No trouble at Tesco

With supermarkets fighting tooth and nail for market share, food price inflation dropping like and stone, and the threat that tax hikes and government spending cuts will put a dampener on consumer spending, now doesn't seem like the ideal time for them to be making major leadership changes.

And if you're an investor in Tesco, and the man on the way out is Sir Terry Leahy - whose talents have taken Tesco from a UK discount supermarket to the world's third largest retailer in 15 years, and who is often touted not just as the UK's best grocer, but the UK's best businessman - then you'd be forgiven for worrying.

We don't think there's much to be concerned about, though. Sir Terry's replacement, Philip Clarke, is a Tesco lifer who's has sat on the board for the last 12 years. With responsibility for IT and international expansion, he's been a key man in delivering Sir Terry's strategy. Unsurprisingly, his appointment has been well received by the City, despite his current low profile in the market. Analysts see him as something of a Leahy "clone", or - as the FT's Alphaville cheekily puts it - a "like-for-like" replacement.

Some analysts have expressed concerns that, despite the apparent smoothness with which Tesco has managed its succession, those executives that didn't get the top job could leave to fulfil their ambitions elsewhere. Those predictions of a "brain drain" aren't entirely groundless - fresh foods commercial director Colin Holmes has already tendered his resignation without, it seems, another role to go to.

But other contenders for the top job look to stay on after being given major roles as part of the reshuffle - Richard Brasher and David Potts will respectively take the newly created roles of UK and Asian chief executives. If anything, the succession has given Tesco the opportunity to strengthen its management structure.

Giving the UK to such a safe pair of hands is important. The domestic market is hugely competitive, and new chief executives at rivals Asda and Morrison will be keen to make their mark by taking a bite out of Tesco's 30 per cent share - although the success of Tesco's relaunched Clubcard means it won't be easy for them.

UK strength also underpins Tesco's ability to continue its relentless expansion into key growth markets in the Far East, where Mr Clarke has already masterminded major expansion through astute acquisitions and joint ventures. Those operations have now reached such a scale and that the introduction of dedicated management there makes much sense, and will be key to unlocking the region's huge potential.

That process is already well underway in South Korea, Tesco's largest international market making annual profits of £300m on sales of £4.5bn - Sir Terry expects it to grow to four times that size, recently pointing out that "South Korea today is where the UK was fifteen years ago". Tesco is believed to be eyeing a second acquisition in the country, which would add 50 Kim's Club stores to the 182 Home Plus outlets it already operates.

China and India have the potential to be even larger, and the success of early joint ventures there bode well for Tesco's overseas future. And although loss-making, its Fresh and Easy business in the US is recovering as consumer confidence improves there, and in fact Tesco commented that "the long-term global recovery is well underway."

Because of this broad growth potential, we're inclined to overlook the short-term trading worries that more bearish analysts focus on. While a first quarter like-for-like sales uplift of just 0.1 per cent was the worst in some time, Tesco stuck to its full year targets and, more importantly, said profitability was still improving. The low current inflation is an industry-wide problem, and just as it's up against high inflation a year ago, so that will cycle out over the next 12 months.

Tesco's fast-growing non-food business also adds a welcome cushion - it's now a £1bn a year clothing retailer and is growing its share in electronics and video games. There's also still a major opportunity in retail services, which include online division Tesco Direct and its banking business, which is slowly but surely building its own infrastructure to become a full service retail banking operation by 2011 and a serious rival to the high street banks that UK consumers have grown to mistrust.