Buffett fires £500m warning shot to Tesco CEO

If you’re as influential as Warren Buffett, all you need to do to raise the value of an investment is increase your stake. But it’s not enough to recoup his Tesco losses …

US billionaire Warren Buffett has swiftly raised his stake in Tesco from 3.21% to 5.08%, spending around GBP 500 million. Markets and analysts alike have chosen to see the move by one of the world’s most respected investors as a vote of confidence in the retailer. Shares in Tesco fell by 16% last week, when the UK retailer issued its first profit warning in 20 years, following porr Christmas trading. That news shaved GBP 5 billion of the retailer’s market capitalisation. But the stock rallied slightly on the revelation of Buffett’s increased commitment, edging up by 1.87 %.

Comment: The papers have been styling Tesco’s bad news as a “shock profit warning”. It’s a shock in the pure sense of the word, since we’d grown used to Leahy’s steady hand on the Tesco tiller. But it’s surely not surprising — even to those of us who are not rocket scientists. If you decide to give away all your margin at the one time you are guaranteed to make very hefty sales then profits will go down. To make that risky strategy pay, you need to raise the volume of sales significantly. Starting a price war is like spilling a little petrol on the wooden deck of your boat and setting light to it. Underestimating your competition is like throwing your masts into the fire.

I’ve decided to go large on metaphor because CEO Philip Clarke insisted, last week, that he was standing on a “burning platform” and had now taken the visionary decision to get off it. I love this — and not only because the imagery is straight out of Sonic the Hedgehog. Clarke was attempting to sell flawed strategy followed by a u-turn as a major leadership decision. No. The “big price drop” strategy was plain wrong and a CEO should know his rivals better. Clarke started something he couldn’t finish. The leadership should have come before he set light to his boat. Not after.

It’s perfectly normal for a long-term investor in a “safe” stock to seek more influence over management when that stock suddenly becomes volatile. If I may string out the tawdry nautical metaphor for just one more paragraph, I take Buffet’s increased stake not as a vote of confidence but rather as a shot across Clarke’s bows.

Picture credit: Tesco plc


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