News Column

Nils Pratley on Saturday Will Clarke prove value for money at Tesco?

June 28, 2014

Nils Pratley



=Philip Clarke survived his third annual meeting as chief executive of Tesco. Will he be there for a fourth? Half the City is playing the game of fantasy chief executive, and some former Tesco directors have been muttering darkly about Clarke's supposed strategic errors and how the company's woes shouldn't be dumped on former boss Sir Terry Leahy.

Clarke certainly has made mistakes. He should have binned Leahy's US folly, the Fresh & Easy chain in the US, immediately.

But shareholders have good reason to ditch Clarke only if they believe his UK strategy is wrong and that he has misread a market where discounters are on the march. This boils down to a simple question: do investors believe Tesco should cut its prices deeply, take the fight to Aldi and Lidl, and accept that profit margins of 5% are no longer viable?

"Be in no doubt, reducing prices doesn't result in an immediate increase in sales," said Clarke yesterday. "These things take time." In other words, he is not the man to launch a price war. He is seeking "the right blend of price, quality, range and service", as he put it in February.

The sermon sounds complacent. The view from the tills, as expressed by one shareholder-employee yesterday, is that customers don't want vouchers and "price promises", they want lower prices.

Over at Morrisons - where the latest sales figures were even weaker than Tesco's - Dalton Philips also has a very different take from Clarke's. The "brutal reality", he said this week, is that big grocers need to fight back or risk discounters grabbing 25% of the market, versus 8% today. Look what Ryanair and easyJet did to traditional airline carriers, he argues. And look at how Carrefour, the big boy in France, has regained market share by cutting prices.

Do Tesco shareholders really want to sanction a price war, which would mean accepting a lower share price, at least in the short-term? Most, one suspects, are not convinced by Clarke's strategy but still hope he might be proved correct. Another profits warning would force them to get off the fence. If it doesn't happen, Clarke ought to be safe. But a warning after three years of heavy capital investment would surely force a strategic rethink.

=Another day, another message from the governor of the Bank of England on interest rates. This time Mark Carney cited 2.5% as the market's definition of a "new normal" bank rate and said it could arrive in the first quarter of 2017.

An "old normal" rate was 5%, he told the Today programme, but the world has changed. UK consumers and the UK government are still heavily indebted, the eurozone is weak, the pound is strong and banks have to hold more capital and will pass on costs to borrowers.

One can understand why Carney wants to return attention to the Bank's "big picture" view that increases in rates will be "gradual and limited". It was a mistake to ignite a debate on the actual timing of the first rise, as Carney did in his Mansion House speech when he made the electrifying remark that the moment could come "sooner than markets currently expect".

Inevitably, the comment would be over-analysed, notwithstanding the get-out clauses. Equally inevitably, Carney would be obliged to clarify, or at least emphasise, the uncertainties in the data. As a result, MP Pat McFadden at the Treasury select committee this week called Carney "an unreliable boyfriend". The label will stick.

What to make of this latest talk of the "new normal" being 2.5%? The precision jars. The Bank's forecasting record on the economy is poor. It is perfectly possible that bank rate could be stuck at 1.5% in early 2017 if growth in wages continues to be sluggish and if the eurozone is still in a funk. On the other hand, one can imagine the "new normal" being close to the "old normal" if events turn out differently.

Mervyn King, Carney's predecessor, had a stock answer on interest rates: decisions are made by the monetary policy committee on a month-by-month basis. If Carney felt such stonewalling would be unhelpful in the current climate, his "gradual and limited" phrase struck the right note - reassuring but vague. Why offer a hostage to fortune by talking actual numbers?

="I have always made it clear that cultural change will take time," says Antony Jenkins, chief executive of Barclays, in a memo to staff describing his "deep disappointment and frustration that our business is back in the news this week for the wrong reasons".

Perfectly true. Jenkins has often said his admirable ethical crusade is a five- to 10-year affair and that there will be "challenges" along the way. Even so, copping a big fine for running a dodgy "dark pool" would look naive.

To recap, the New York attorney general alleges "a pretty flagrant example of fraud" at Barclays in New York. Eric Schneiderman contends that the bank was using devious tactics to lure unwary investors into a private trading pool full of sharks, aka aggressive high-frequency traders.

That the supposed fish are actually big institutional investors, who ought to know to carry shark-protection equipment, is beside the point. Schneiderman's main allegation is that Barclays lied to customers about how many "predatory" high-speed trading robots were present.

Jenkins has dispatched the group's general counsel and brought in "substantial external resource" to establish the facts. A full response will follow. "If there has been wrongdoing, we will address it quickly and decisively," he says.

Fine, but if wrongdoing is admitted or proved, Jenkins will have to explain how Barclays failed to spot it.

Regulators have made no secret of their wish to peer into these dark, or private, trading pools. The US securities and exchange commission has been running an investigation for the past year.

Central bankers have been fretting about ultra-fast computer trading since the "flash crash" on Wall Street in March 2010 when the Dow Jones industrial average suddenly plunged 9% and then recovered in minutes.

In short, the warning lights for operators of dark pools should have been written in neon.

If Barclays has slipped up, it's a question of competence. As ever in banking, good intentions are one thing, good behaviour is what matters.



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Source: Guardian (UK)


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