Deep cuts and big sales: Is this a Tesco turnaround?

Tesco shares rose by over 10% following the unveiling of CEO Dave Lewis' plans to turn the supermarket giant around.


Is Tesco on the path to recovery?

Tesco this morning announced extensive cuts in a bid to recover from a terrible 2014. A statement from CEO Dave Lewisannounced "a restructuring of central overheads, simplification of store management structures and increased working-hour flexibility, delivering savings of c.£250m per year". Tesco also saidthat it will not pay a final dividend for 2014/15.

The supermarket chain will shut 43 unprofitable outlets and abandon plans to open 49 "very large" stores. Two of Tesco's businesses Tesco Broadband and video-streaming service Blinkbox will be sold to TalkTalk.

"We back the radical package outlined", one top ten shareholder told the Financial Times. "Costs have to come down so that prices can come down. Tesco has to become competitive in terms of price, like it was five years ago. People will go to Aldi because they can get the same products cheaper. It is that simple."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Markets responded well to Tesco's announcement. Shares traded above £200 this morning for the first time since September, having opened at £190.25.

Tesco's good news helped the FTSE 100 index climb 1.2%, or 78 points, to 6,497.87 in morning trade.

Analysts also reacted positively, but advised caution: "In terms of dealing with priorities, they've done all the right things with the balance sheet, but it's clearly not the end yet," said Bruno Monteyne at Sanford C Bernstein in London.

For some, Tesco's actions were long overdue. "Take a step back from the display of fireworks, and you realise how severely Tesco has lost its competitive edge over the last half-decade", wrote Nils Pratley in the Guardian.

"Lewis's plan to cut 30% from central costs is a spectacular confession of corporate flabbiness. The old Tesco that terrified the competition may be half a decade away and that's if the plan succeeds.

In other supermarket news, Sainsbury's had a good morning. Its share price had risen by9.56% at lunchtime. But Marks & Spencer had a torrid early session, down 4.43% after it announceddisappointing sales figures for the festive period.

UK sales fell by 2.7%, with poor online sales (down 5.9%) partly to blame. International sales were also poor, falling5.8% year-on-year.

Mischa graduated from New College, Oxford in 2014 with a BA in English Language and Literature. He joined MoneyWeek as an editor in 2014, and has worked on many of MoneyWeek’s financial newsletters. He also writes for MoneyWeek magazine and