Tesco chief's basket of problems fills up When Philip Clarke, chief executive of Tesco, stood before shareholders at their annual meeting in Cardiff, the Welsh capital, last year, he was under pressure to pull out of the retailer's US operations. The Tesco veteran of almost 40 years has since heeded those calls, and pulled the plug on predecessor Sir Terry Leahy's American dream - at a cost of £1bn. Tesco troubles Sales growth, UK store openings, share price But when Mr Clarke faces shareholders in London on Friday, he will do so with a plethora of other problems to contend with - and they will require him to reconnect not just with shareholders, but with the supermarket group's other major stakeholders: its customers. If a culture of success bred a reluctance to listen, then overcoming past failures will need a willingness to engage on both the shop floor and trading room floor, analysts now say. Mr Clarke's new management team - only one of the directors who ran the business under Sir Terry remains - already has a lengthy to-do list. Agreement has not yet been struck to sell the US business, Fresh & Easy. Recovery in the UK, after Tesco's profit warning in February 2012, is not yet a given. Meanwhile, in Tesco's sprawling international empire, Mr Clarke continues to fight fires - from regulatory constraints in South Korea to economic malaise in central Europe. "Obviously, the UK is now suffering, but everywhere else is as well," says one top 10 shareholder. Mr Clarke became chief executive in March 2011, in the company's biggest management transition for 14 years. In taking over from Sir Terry, he was following a man who had transformed Tesco from a struggling domestic grocer into an assertive world-class brand. Initially, Mr Clarke was enthusiastic about his inheritance. But in early 2012, after a £500m price cutting scheme failed to gain traction, he issued Tesco's first profit warning in 20 years - which wiped £5bn off its market value. Tesco UK, which still accounts for about two-thirds of group sales and profits, had been run too "hot," he said, alluding to the way the group had been trying to squeeze out every last profit in the UK, to bolster operations elsewhere - including the US. Having accumulated a large UK land bank over the preceding decade, Tesco had opened more big supermarkets - but appeared to have lost touch with its customers, who were increasingly shopping online or in convenience stores. Clive Black, analyst at Shore Capital, says some of the issues Mr Clarke now faces were "undoubtedly" a legacy of past decisions. "To use rugby parlance, the ball was thrown somewhat faster and lower than he was expecting," he says. Nevertheless, Mr Clarke must now deal with the consequences. Reconnecting with customers has meant changing Tesco's culture. According to people familiar with the company's management, a culture of success had led to a defensive arrogance. "I think he has tried to make Tesco listen again," says Mr Black. But Mr Clarke will need any change in attitude to deliver a quick turnround in his UK stores, where underlying sales fell 1 per cent year on year in the three months to May 25. While sales are growing in convenience stores and online, analysts estimate that in the core store estate, they are going backwards. He is spending £1bn making stores more inviting, putting food at the heart of the offer, and increasing staff numbers. But he also knows that the new shopfront is the internet. In a telling echo of a much-quoted statistic about Tesco's share of high-street spending, research group Verdict now estimates that £1 in every £8 will be spent online. Demand for many commodity items, such as consumer electronics, is migrating from supermarket shelves on to retail websites. Consequently, Tesco is ditching in-store sales of electricals, which will drag down sales. It is also downsizing. A 120,000-sq ft store in Stockton-on-Tees, for example, is to be reduced to 80,000-sq ft - by installing a gym on the store's mezzanine floor, and a children's play area on the ground floor. Philip Dorgan, analyst at Panmure Gordon, says Tesco is making strides online. He estimates that Tesco generated £2.4bn of UK grocery sales via the internet in the year to February, with another £281m of online groceries sales overseas. By contrast, Mr Dorgan suggests Tesco Direct - which sells non-food items, such as clothing and entertainment online - generated online sales of just under £500m. He estimates UK and overseas grocery online made a profit of £225m, while Tesco Direct made a £60m loss. But with the pressure on UK sales, concerns about Tesco's profitability are emerging once more. Its shares have fallen 8.5 per cent since a disappointing first-quarter update. "In an industry that keeps adding capacity faster than demand, Tesco is still losing market share, suffering like-for-like declines, and faces considerable profit pressures," says Dave McCarthy, Investec Securities analyst. If this were not enough, Mr Clarke faces challenges outside of Tesco's domestic market. In the three months to May 25, like-for-like sales in Asia fell 3.8 per cent year on year, and 5.5 per cent in central Europe. "What we can say beyond doubt, and according to Tesco's accounts, is collectively, its international businesses are earning less than 6 per cent per annum, which is below the cost of capital," notes Mr McCarthy. They are destroying shareholder value. Mr Clarke, who ran Tesco's international operations before becoming chief executive, has exited the US and Japan, and analysts believe further corporate activity is a possibility. Tesco is already eyeing a joint venture in China, according to people familiar with the situation. India also offers significant potential, although the global grocers want more clarity on retail liberalisation. Either way, in the wake of the US debacle, any more bold global moves are unlikely. Any new ventures will be tested carefully. This approach is also being taken in the UK, where new formats are being refined before being rolled out. Tesco, it seems, is more willing to listen to customers. The question is: will shareholders be in a mood to listen on Friday.