Tesco is realigning its focus to the U.K. market, which accounts for nearly 70% of the company's $120.35 billion in annual sales. Johnny Armstead/Demotix/Corbis
LONDON—At a cavernous Tesco  PLC superstore in Tottenham, North London, one recent morning, customers looked confused. The clothes department backed onto the fresh-fruit section, which itself led to an aisle dedicated to the Muslim festival of Ramadan.
Five minutes down the road, at a newly built Lidl Ltd. discount store, the layout was far simpler: wall-to-wall groceries, piled high and sold cheap. Shoppers were lining up 10-deep to pay.
The contrast sums up the problem faced by Tesco: Since the financial crisis, British consumers have changed the way they shop, but Tesco hasn't changed the way it sells.
Earlier this month, Tesco reported its worst decline in quarterly sales in Chief Executive Philip Clarke's 40-year career at the company, which perpetually vies with Carrefour SA to be the world's second-largest retailer, behind Wal-Mart Stores Inc. Sales, excluding gasoline, in U.K. stores open for more than a year fell 3.7% in the three months through May compared with the year-earlier period.

But some shareholders and former employees say a difficult competitive environment has been compounded by an intransigent chief executive and a weak, inexperienced board.To some extent, Tesco is the victim of a seismic shift in shopping habits being felt on both sides of the Atlantic. Price-conscious shoppers now go to smaller, local stores and discounters for everyday essentials—or get them online—and visit upmarket stores for treats. For many families, weekly food shops in the large out-of-town superstores Tesco pioneered are a thing of the past.
More than three years into his time as CEO, Mr. Clarke has struggled to find a strategy that works. His first major campaign, announced in the fall of 2011, was known as "the Big Price Drop" and aimed at cutting the prices of everyday products. But the cuts didn't go far enough and Tesco's competitors—such as Wal-Mart's Asda, J. Sainsbury PLC and Wm. Morrison Supermarkets PLC—were able to win a price war by flooding the market with coupons and promotions. Critics renamed the campaign "the Big Price Flop."
Those critics also point to Mr. Clarke's failure to pull out of Tesco's U.S. venture, Fresh & Easy, sooner than he did. Mr. Clarke said the U.S. represented "great value" for Tesco only six months before deciding to pull the plug in December 2012. In five years, Tesco invested £1 billion ($1.69 billion) in Fresh & Easy, but never made a profit.
Many customers who started shopping in discount stores during the depths of the recession haven't returned to Tesco or its mainstream rivals. Getty Images
After years of hapless international expansion—it failed to break into Japan as well as the U.S.—Tesco is realigning its focus to the U.K. market, which accounts for nearly 70% of the company's £70.89 billion ($120.35 billion) in annual sales.
Mr. Clarke has invested £1 billion to revamp Tesco's British stores and hire new staff. Earlier this year, he said Tesco would invest a further £200 million in cutting prices to compete with discount chains and attempt to win back customers. Even so, Tesco's same-store sales in the U.K. haven't grown since the last quarter of 2012.
"Philip Clarke is not a visionary," said Nicla Di Palma, retail analyst at Brewin Dolphin Ltd., a major Tesco shareholder. "In terms of making the big strategic decisions, he probably won't."
Tesco said Mr. Clarke wasn't available for comment, but a spokesman for the company said, "Since 2011, we have taken decisive action across the group," citing restraint on large store openings, investments in the U.K. business, the exits from Japan and the U.S., and the formation of a China joint venture.
Philip Clarke, chief executive officer of TescoBloomberg News
Critics say Mr. Clarke failed to spot the rise of the discounters, which have upped their game. New commercials for Aldi Stores Ltd., the German discount chain, proclaim its products to be "like brands, only cheaper." The ads cite taste tests that show some consumers prefer Aldi's private-label cheddar cheese and cider to big brand names.
Many customers who started shopping in discount stores during the depths of the recession haven't returned to Tesco or its mainstream rivals.
"I always shop here," said Diana Ivanova, a 31-year-old designer coming out of a Lidl store in London. "I just don't think I should pay more for the same thing."
Each week Tesco is missing out on a million customer visits, equivalent to £25 million in sales, according to retail analysts at HSBC, which used data from Kantar Worldpanel, which closely tracks U.K. grocery spending.
"The business is more competitive than it has been for years," Mr. Clarke said after the sales update. Both the result and the response caused an outcry among investors and analysts who see little prospect of Tesco returning to revenue growth before 2015.
According to two people familiar with the company's leadership, part of Tesco's current problem is the structure of the board and executive committee. Many top executives and board members have left in the past three years and have been replaced by people lacking the experience to stand up to Mr. Clarke, the people said.
Mr. Clarke, who began his career at Tesco stacking shelves in 1974, is used to having his own way. "You can't have two captains in one team," he said after Richard Brasher, formerly head of Tesco's U.K. business, resigned following the failure of the Big Price Drop.
Tesco disputes it has problems with its board and executive teams. "We have a strong board which includes chairs of five FTSE companies and four serving or former FTSE CEOs," the Tesco spokesman said. "In addition, we have an executive committee with a blend of talent from within Tesco and directors new to Tesco with the skills and experience we need to lead in the new era of multichannel retailing."
Not all investors are losing faith in Mr. Clarke. "We are still supportive of Phil Clarke because he has correctly identified the problems in the U.K. and has taken steps to aggressively address those issues," said David Herro, chief investment officer at Harris Associates LP, Tesco's No. 3 shareholder.