11 Jun 2012

Oil shock’ hitting demand, says former Tesco boss

With Tesco reporting a 1.5 decline in sales, former chief executive Sir Terry Leahy tells Channel 4 News a doubling in the price of oil has hit UK consumers “more than anything else”.

In an interview with Channel 4 News’s Cathy Newman, Mr Leahy said that all companies were experiencing a bit of “wear and tear” and backed his successor Phil Clarke’s decision to carry out a £1bn revamp of its UK operations.

“If we could get a bit of a relief from high energy prices I think I would see a little recovery in the shops,” said Mr Leahy, who also backed Mr Clarke’s offer to give up his bonuses if sales do not improve.

Mr Leahy claimed that while the UK’s reliance on the financial services sector and the problems in the eurozone had contributed to the UK having a slower economic recovery than eurozone counterparts, the doubling of the price of oil in two years had been a major factor in this.

‘Oil shock’

“There has also been an oil shock,” he said. “The oil price has virtually doubled since 2010 and at a time when sterling depreciated, so actually the price of energy going into the UK rose whereas it didn’t in Europe.”

“Actually, that has hit consumers more than anything else. It has taken money out of their weekly wages. The economy was recovering quite well at the end of 2010 and it slowed really because of the energy crisis, I think.”

Tesco’s UK sales have fallen over the past three months, in what the retailer said was “a challenging quarter for the industry as a whole”.

Like-for-like UK sales, excluding both petrol and VAT, declined by 1.5 per cent in the 13 weeks to 26 May, although this did not include the period around the Queen’s Diamond Jubilee when it enjoyed its biggest ever week outside Christmas.

Back on track?

Back in April, Tesco announced that it was to spend £1bn on revamping its UK operation.

But retail analysis have said Tesco struggled to convince the market it is back on track today despite reporting a record £1bn of jubilee week sales.

Although investors were spared another profits warning, shares dropped amid fears it is giving out more money-off vouchers to bolster its performance.

Despite its latest quarterly sales decline, Tesco said its £1bn overhaul, which has seen it revamp 100 stores and recruit 4,300 extra staff, is beginning to gain traction as it competes more convincingly with rivals.

Philip Clarke said: “Our customers are seeing the evidence of the changes we’re making and they’re telling us they like what they see.”

Tesco kept its profits outlook for the year ahead unchanged, reassuring investors after the chain’s first profits warning in 20 years in January.

Clive Black, an analyst at Shore Capital, said: “We see Tesco UK as toughing it out a little more effectively than it was.”

But he added that it will take at least two years for the turnaround to be completed.

Competative market

The retailer is struggling in a competitive market, as it battles it out with buoyant rivals Sainsbury’s, Asda and discounters Aldi and Lidl at a time when shoppers are cutting back.

However, Freddie George, an analyst at Seymour Pierce, said: “We continue to believe that Tesco is still a strong business with an unassailable market leading position in the UK, that has temporarily come off the rails.”

As some in the city worry that Tesco’s dominance over the last decade is under threat, it has faced pressure to make radical changes such as exiting its banking or loss-making US divisions.

However, Mr Clarke’s turnaround plan has focused on sharpening up its pricing and customer service and refreshing its jaded and tired stores.

It has already given 145,000 staff specialist training, improved the offers through its Clubcard scheme and relaunched its Value range as Everyday Value with more colourful packaging.

Mr Clarke added: “We are rapidly implementing our six-point UK plan and I’m particularly proud of the relaunch of our Everyday Value range and the fact we have now put extra staff into 700 of our stores – in 500 of them within the last three weeks alone.”

He said the group’s sales overseas proved resilient, despite battling slowing economic growth in China and the eurozone debt crisis.

Across its international divisions, which make up about a third of its profits, underlying sales rose 0.5 per cent, helped by strong growth in Thailand as it recovered from heavy flooding the previous year.