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Will A New Tesco CEO Care To Keep Funding Losses At Fresh & Easy?

Jim Prevor’s Perishable Pundit, June 11, 2010

Although we have written extensively about Tesco’s journey to America as Fresh & Easy, we haven’t written much lately. Mostly because there was no point in beating a dead horse.

Covering Tesco’s announcements had gotten plain silly. After years of Tesco executives explaining that its losses on Fresh & Easy were all a function of its building a massive infrastructure and that losses would disappear quickly as volume increased, much attention was paid to its sales and earnings for its fiscal year ending February 27, 2010.

The shocker was this: Whereas in fiscal year 2008/2009 Fresh & Easy reported sales of only $305 million, sales jumped to $544 million in 2009/2010. That is a big jump in volume, and if the problem was that the losses were caused by the maintenance of a system able to handle larger volumes, we would have expected losses to shrink dramatically, maybe even turn into the black. Yet, what actually happened was that losses increased. In 2008/2009 losses were $208 million, yet with the higher volume losses went up, not down, by $45 million to $253 million.

When asked how he felt about these losses, Tesco’s CEO Sir Terry Leahy proclaimed himself to be “delighted” — leaving us to wonder what adjective he would have employed had they actually made money!

Well, it turns out that we won’t have Sir Terry Leahy to kick around anymore. Tesco announced that Sir Terry had decided he would be leaving Tesco and Tesco announced that he would be replaced by Philip Clarke, who heads up Tesco’s European and Asian operations.

In March of 2011, when Sir Terry will step down, he will be only 55 years old and a very wealthy man. We are told he wishes to devote his attention to private investing in areas of “green energy” and “sustainability” and we, of course, wish him well. He is widely recognized as having done a masterful job of transforming Tesco into a global giant, poised on the verge of overtaking Carrefour as the number-two retailer in the world. Sir Terry led expansion efforts overseas and moves into non-food and financial services.

The one stunning failure of his tenure must be counted as his inability to establish a profitable operation in North America. Indeed the unexpected retirement was unexpected in no small part because Fresh & Easy was seen as unfinished business and the assumption, among many analysts, was that Sir Terry would wait to leave triumphantly when his biggest gamble — Fresh & Easy — had started to pay off.

Of course, there is always the possibility that he has despaired of that day ever coming.

Which leads to what may prove to be the most significant impact of Sir Terry’s departure: The appointment of a new CEO less emotionally invested in Fresh & Easy.

It is notable that Tim Mason, who heads up the US business and is the son-in-law of Sir Terry’s mentor, Lord MacLaurin, a former Tesco Chairman, was not selected. He did get broadened responsibility as Deputy CEO and will also handle group branding, values and climate change.

It is unclear how Tesco allocates Tim Mason’s compensation but, these additional responsibilities will help Fresh & Easy if it means they have to pay less of his compensation. Because his division — Fresh & Easy — lost $253 million dollars last year, an increase of $45 million from the year before, Mr. Mason did not earn all the incentive pay he could have received and so had to struggle by on just £4,530, or a bit over $6 million dollars in compensation last year.

Sir Terry Leahy said that the losses in Fresh & Easy have peaked. So, presumably, that means the losses will be less than $253 million this year. We will see.

But, quite crucially, Fresh & Easy now becomes someone else’s project. If before Philip Clarke takes over in nine months, a clear path to profitability is not obvious for Fresh & Easy then radical surgery, such as reformatting to follow our suggestion, and redo the stores in the style of either Trader Joe’s or Aldi or a joint venture with an American retailer or, yes, closing down the division becomes much more likely.

In all likelihood, Philip Clarke’s compensation will be tied to profitability and the stock price. If Fresh & Easy comes to seem like a quarter-billion-dollar-a-year liability for as far as the eye can see — both profitability and stock price will respond positively to getting the losses off the books.

Fresh & Easy was Sir Terry’s baby, and parents are not always rational where their children are concerned. Philip Clarke will be more steely-eyed and the word will probably go out: Fix it, sell it or close it. He takes over in March of 2011. The countdown begins now.

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