By Paul Sandle and James Davey
LONDON (Reuters) - Dave Lewis, the new boss of Tesco (L:TSCO), Britain's biggest grocer, is betting on a customer charm offensive coupled with selective price cuts to prevent poor Christmas trading compounding an already disastrous year for investors.
The group, like its big three UK rivals Wal-Mart's Asda (N:WMT), Sainsbury's (L:SBRY) and Morrisons (L:MRW), has suffered as shoppers turn against the traditional big weekly hypermarket shop.
Instead they are increasingly spending more at discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL], at convenience stores and online, with the odd treat from upmarket retailers Waitrose (JLP.UL) and Marks & Spencer (L:MKS) thrown in.
Tesco's woes have been exacerbated by an accounting scandal requiring a total re-setting of its relationships with suppliers. A fourth profit warning in five months on Tuesday sent its shares, which have halved in value this year, to a 14-year low.
"Most people think the wider recovery at Tesco is going to be painful and very protracted. One tends to feel that like-for-like sales could well remain in negative territory for another 18 months to two years," said Charles Stanley analyst Sam Hart.
The last few weeks before Christmas, however, remain the busiest of the year for grocers, and Tesco's poor performance last Christmas, when underlying sales fell 2.4 percent, set the tone for a year to forget in 2014.
Given current trends, analysts don't expect any of Britain's big four grocers to exceed last year's Christmas performance on a same-store basis.
In an attempt to stem the rate of shopper defections, Lewis has recruited 6,000 extra workers into stores to improve customer service, while 6,000 head office staff are working half a day a week in stores in the run-up to Christmas.
He has also cut prices on Christmas products and on 1,000 key lines, where he has focused efforts on improving availability. Stores are cleaner, tidier and warmer, and more check-outs are open.
SURGICAL APPROACH
"(We are) trying to take a more surgical approach to put things in that help the offer without destroying the Christmas operation," Lewis told reporters on Tuesday.
Neil Saunders of retail consultancy Conlumino says that while Tesco's problems will take years to fix, this Christmas is still important because it represents a first opportunity to judge how Lewis is faring.
"Good stores that are well stocked are going to trade far better than stores with holes in key product lines and items missing and out of stock, and that has been one of the issues at Tesco," he said.
Lewis said Tesco's third quarter performance was slightly better than its first half, when UK same store sales fell 4.6 percent.
"It's going to remain in negative territory (in the Christmas period) but as long as we don't see a further deterioration, I think investors will be reasonably content," said Charles Stanley's Hart.
Andrew Stevens, analyst at Verdict, the retail research group, says Lewis needs to at least demonstrate a decent reception from shoppers of Tesco's Christmas offer.
"Even with like-for-like sales falling, if they can prove that customer numbers are not declining, or not declining anywhere near as fast as they have been, then you would say that things are starting to pick-up again," he said.
But Mike Dennis analyst at Cantor Fitzgerald does not expect Tesco's UK business to make any profit in its second half and is wary of Lewis claiming progress at Christmas, noting there was bound to be less of a drag from its non-food business this year as a lot has been shifted online. The firm is also issuing more money-off vouchers, which benefit sales but hurt margins.
Tesco is certainly doing more to get into the Christmas spirit and Lewis says morale on the shop floor remains good despite the firm's woes. In a Tesco Extra hypermarket in North London, some staff had donned Christmas hats and jumpers, with one sporting a reindeer tie.
OUT OF KILTER
But Tesco's prices are still seen as out of kilter with the market. Recent research from analysts at Bernstein noted that Tesco used to be within 1 percent of Asda, Britain's No. 2 grocer, but that gap has now moved to 6 percent.
Lewis's investment in prices so far looks modest compared to some of the numbers bandied about by rivals.
Of 500 million pounds in extra costs that caused Tuesday's profit warning, one third related to re-setting supplier deals, while one third was from ceasing practices that "artificially" inflate Tesco's final quarter performance. Only the final third reflected investment on staff, product availability and prices.
Lewis said he reserved the right to cut prices more if he feels he needs to be more competitive, but customers will know about it before anybody else. Company officials privately say they probably will cut prices further.
But Sainsbury's, Britain's No. 3 grocer which maintains its prices are currently 1 percent cheaper than Tesco, does not expect its biggest rival to "go nuclear" on prices.
Its chief financial officer John Rogers told investors last week that Tesco would need to spend 500-600 million pounds to be where Sainsbury's plans to be within 12 months - investment that would put Tesco's balance sheet under even more strain.
(Additional reporting by Neil Maidment and Liisa Tuhkanen; Editing by Peter Graff)