Terrifying Tesco

A few days ago Tesco announced its worst full-year loss ever and one that ranks among the biggest in the history of British business — £6.4 billion. The company took a cart load of special charges to account for three years of declining sales, profits, and cash flows and a financial reporting scandal. It also disclosed uncomfortably high leverage (adjusted debt to EBITDAR of 7.4x) and limited amounts of liquidity (a liquidity position of £3.4 billion). There are signs Tesco is getting better. It cut prices, improved service, laid off staffers, closed stores, and agreed to start funding its pension deficit. Customer traffic and purchases in the UK are growing again, and the rate of sales decline there slowed to (1.0%) in Tesco’s fourth quarter. Tesco’s CEO “Drastic Dave” Lewis made a lot out of this, saying, “They are pretty good vital signs,” and, “This patient is OK.” But he may be discounting his company’s immediate tactical problems. Worse, he may ignoring a long-term strategic threat. Tactically, Tesco is still in retreat. Discount grocers Aldi and Lidl are capturing more and more share from Tesco and the other mid-market chains in the UK. And they’re gaining at a growing rate.   We don’t think Lewis is trying to transform Tesco into a low-cost, low-price chain and win back lost market share. He’s trying to hold on to a core set of customers who prefer Tesco’s variety and convenience. He understands he has to shrink to a cost base that supports that still-big but smaller business. His plan may succeed in the short run but fail in the long run.  This has to do...

The Rise and Fall of Kodak

Kodak dominated mass-market consumer photography for over a century. But it failed to meet the challenge from digital photography and went bankrupt a year ago. How could a company as strong as Kodak fail so badly? This post explains what happened to Kodak. In our next post we’ll explain why it happened in terms of an important risk dynamic we call the “Incumbent’s...