'Unknown' new Tesco CEO must battle Brexit, German discounters, and changing tastes
Investors and analysts have been left scratching their heads at the appointment of Tesco’s new CEO Ken Murphy, a “unknown quantity” with an impressive CV but no profile in the UK.
Tesco surprised the market on Wednesday when it announced that its widely-admired CEO Dave Lewis would step down next year. Murphy, an executive at US healthcare and pharmacy giant Walgreens Alliance Boots, was announced as his replacement.
“I think it’s fair to say that Mr Murphy is a completely unknown quantity over here,” Russ Mould, investment director at stockbroker AJ Bell, told Yahoo Finance UK.
Bruno Monteyne, head of European retail at Alliance Bernstein, said: “Most people don’t know him.” Monteyne himself spent a decade at Tesco, leaving in 2012.
Who is Ken Murphy?
While relatively unknown, Cork-born Murphy has a strong CV. The 52-year-old Irishman began his career at drugs wholesaler UniChem which became part of Boots after a series of takeovers. US drugs giants Walgreens bought Boots for £9bn in 2014 and Murphy rose to become chief commercial officer and president of global brands at the combined company. A qualified accountant, Murphy also has an MBA from Harvard Business School.
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Ken Odeluga, chief market analyst at City Index, said Murphy was “clearly suited by dint of experience and seniority.” But he added: “He is nevertheless a relative unknown among major investors. That adds to the sense that his appointment does not necessarily represent a smooth transition.”
Clive Black, a retail analyst at stockbroker Shore Capital, told Yahoo Finance UK the appointment reflected the fact Tesco has “a talented internal management team that aren’t yet quite ready to take the CEO mantel.”
Charles Wilson, the chief executive of Tesco’s wholesale business Booker, was widely tipped as Lewis’ likely successor but was forced to resign from the board last year after being diagnosed with cancer. He ruled himself out of the CEO hunt over his health.
“Hence they’ve gone to an external source,” Black said. “That is the judgement of a very mature and able chairman in John Allan.”
Black downplayed the fact that Murphy had little profile in the UK and no experience leading a listed British business.
“I don’t lose too much sleep over that,” he said. “Before Dave Lewis was appointed to Tesco, he was division head of Unilever’s personal care and he wasn’t the Group PLC director and he wasn’t involved in food and groceries.”
Allan said Murphy “has the values which align with our own, strong strategic and operating acumen, and is proven at the very top of a large and respected multinational retail group. I firmly believe we have the right person for the job.”
‘Tesco is in good shape’
Murphy’s lack of profile means there is little indication of which way he may take the business. Analysts said they expected continuity at least for the first year.
“Dave Lewis outlined an ambitious growth plan for Tesco in the UK (Clubcard+, doubling online capacity, more convenience, etc),” Monteyne told Yahoo Finance UK. “Executing on that growth plan will be top priority.”
Shore Capital’s Black said: “Strategic continuity in my mind would make a lot of sense for Ken Murphy until he gets his feet under the table and then take things from there. Tesco is a business in good shape, it’s got the right culture, it’s got the right priorities.”
However, Murphy will have to look towards more than just continuity to ensure Tesco continues to perform in a “challenging” market.
“Mr Murphy will need to keep an eye on costs and continue to bolster Tesco’s competitive position here in the UK, improve performance at the Asian and Eastern European operations (which have struggled for a variety of reasons) and ultimately address the supermarket model and whether it still works,” AJ Bell’s Mould said.
“Consumer tastes are changing when it comes to packaging, sourcing, and also how they shop, through click and collect, online with increased speed of delivery, and increased use of meal-kit, food delivery, and takeaway services.
“In addition, physical stores will continue to change. Will they go cashless? Does shoving large amounts of stock on shelves still make sense, tying up working capital and risking product wastage? Is there a more efficient way to provide shoppers with that they want, to keep them happy, reduce waste, and boost margins?”
Clubcard+, announced on Wednesday by Lewis, is part of an effort to move Tesco into the future. The offering is an Amazon Prime-style subscription that will entitle customers to discounts on Tesco own-brand products and benefits such as extra Tesco Mobile data.
The big hurdles
Innovating for growth is one thing but Murphy will also have to fend off competition from cheap and cheerful rivals to make sure Tesco doesn’t go into reverse. Recent market share data showed Tesco losing ground to the likes of Aldi and Lidl.
“The most disruptive force in grocery over the last decade has been the German discounters and the bargain stores,” Black said. “He’s still going to have to face that challenge.”
Then of course there’s Brexit. The precise timing and terms of Britain’s exit from the EU is yet to be settled but it may well disrupt food supplies and push up prices. Lewis himself has warned as much.
“Who knows what’s going to happen on the first of November,” Black said, referencing the possible 31 October Brexit date. “That’s going to be a challenge for everybody.”
Whatever happens, Murphy will be starting from a strong position.
“Dave Lewis has saved Tesco. He came into a truly chaotic situation,” Black said. “He undertook miracles to stabilise this business. He’s actually leaving Ken Murphy a fabulous platform with a very talented, focused management team who clearly know their roles and responsibilities. Every part of the business is either facing the right direction or on an improving trend.”
It sounds like a blessing but it may yet turn into a curse. Following a star CEO can be a difficult task, as Mike Coupe has found out at rival supermarket Sainsbury’s.
Coupe succeeded Justin King in 2014, when King retired after more than a decade at the supermarket that saw nine years of consecutive growth. Sainsbury’s share price has largely flat-lined since Coupe took the helm and a disastrous failed attempt to buy Asda earlier this year has left investors calling for his dismissal. The supermarket has reportedly begun searching for a replacement.
Murphy will be hoping for better luck when he takes the helm at Tesco next year.
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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.
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