What next for Tesco after a second profits slump?

File photo dated 27/02/13 of Tesco's Chief Executive Philip Clarke who will come under renewed pressure today when he unveils annual results expected to show a second year in a row of profits decline for Britain's biggest supermarket. PRESS ASSOCIATION Photo. Issue date: Wednesday April 16, 2014. Mr Clarke's plan to turn around the fortunes of the retail juggernaut has yet to bear fruit, with sales still sliding, while he now faces the prospect of a price war with the group's major rivals. Tesco, like Asda, Sainsbury's and Morrisons, is having to face up to a permanent threat from discounters Aldi and Lidl, who continue to gnaw at the market shares of the File photo dated 27/02/13 of Tesco's Chief Executive Philip Clarke who will come under renewed pressure today when he unveils annual results expected to show a second year in a row of profits decline for Britain's biggest supermarket. PRESS ASSOCIATION Photo. Issue date: Wednesday April 16, 2014. Mr Clarke's plan to turn around the fortunes of the retail juggernaut has yet to bear fruit, with sales still sliding, while he now faces the prospect of a price war with the group's major rivals. Tesco, like Asda, Sainsbury's and Morrisons, is having to face up to a permanent threat from discounters Aldi and Lidl, who continue to gnaw at the market shares of the "big four" even as economic conditions improve. See PA story CITY Tesco. Photo credit should read: Rui Vieira/PA Wire

Wednesday, April 16, 2014
9:29 PM

There was a point in time when it seemed nothing could stop Tesco tightening its grip on the UK grocery market.

To send a link to this page to a friend, you must be logged in.

But today’s slump in profits suggests that the cracks are now starting to deepen within the supermarket’s global empire.

Underlying pre-tax profits fell 6.9pc to £3.05bn for the year to February 22, while fourth-quarter like-for-like sales slumped by 3pc after a 1.5pc fall in the third quarter.

For Tesco chief executive Philip Clarke, the figures made bleak reading. It posed a stark realisation that his £1bn turnaround plan to guide the retailer back to glory was not bearing fruit.

So how can an all powerful British supermarket with plans for world dominance begin to look so shaky?

The main root of the problem is perhaps the simplest one to identify – its customers.

Although Tesco remains a market leader in its field, the business has taken hit from the squeeze on consumer spending, as customers looked for a cheaper alternative for their shopping when the recession began to bite.

This, in turn, boosted discount grocers Aldi and the German chain Lidl, which gnawed at Tesco’s market share by offering cut-price offers on everyday goods.

Meanwhile, at the other end of the market, it faced further competition from Waitrose, which began to shirk its image as a pricy premium brand by offering an own-label range of basic groceries at a competitive price.

In response, Tesco has vowed to invest £200m in price cuts. But its wider vision was to allure customers back to its stores with a £500m cash-injection that would transform their out-of-town shopping centres into an experience, complete with new independent-style coffee houses, bakeries, and restaurants – including the family friendly Giraffe diners, which Tesco bought last year,

Today, Mr Clarke stuck by these plans, stating “Our results reflect the challenges we face in a trading environment which is changing more rapidly than ever before. We are determined to lead the industry in this period of change.”

He claims that the changes in some of its stores had improved sales by three to 5pc.

But retail analysts have suggested that Tesco is need of a more dramatic transformation if its claw back the customers it has lost elsewhere in the market.

And they have suggested that part of problems could be down to a lack of focus on the UK market, as it strived to expand its reach abroad.

“Whereas their large-scale Tesco Extra stores used to be the golden egg, now they are looking more like the albatross,” said Bryan Roberts, retail analyst at Kantar Retail.

“To a certain extent Tesco overreached themselves in the international market, particularly USA, but they do have a considerable business in Asia. One could argue that this has been a distraction when their eyes should have been focused on the UK market.

“However, when it comes to whether I think their turnaround plan will be a success, I am somewhere in the middle. The Giraffe restaurants, along with the other offerings Tesco has bought in, can be drive in customers in their own right. But the danger is that people go to Giraffe and then turn around and leave the store without incorporating it into their shopping trip.

“But some of Tesco’s sites are simply too big at the moment, and they have had to cut back ranges which have shrinking markets, like its DVD and CD offering, which has freed up even more space in store.

“What we have seen in previous downturns is that some consumers temporarily seek out a discount store then trade back up again. However, some research suggests that this move away from Tesco could be more permanent.

“One of the reasons for this move is because of the lower prices, and the second is because other stores, like Aldi, are an easier shopping experience. Some people do not want to spend a long time walking around an 80,000 sq ft store when they could be walking around 12,000 sq ft Aldi store. It is also relatively stress free experience.”

While today’s results may have been a nasty wake up call to Tesco, they were certainly not all doom and gloom. UK online sales were up 11pc and Tesco Express convenience stores improved by 1.1pc on a like-for-like basis over the year.

And Mr Clarke defended the latest hits to the balance sheet from overseas ventures, pointing to its £20bn in sales outside its home country, despite facing a one-off charge of £801m relating to a write-down of assets in Europe, topped up by a £540m charge after merging its stores in China into a joint venture.

Mr Roberts said that Tesco needed to stop thinking that value only came from slashing prices.

“Consumers shopping habits are becoming increasingly complex,” he added. Some may do their basic shop at Aldi and then take a trip to Waitrose to pick up their fresh goods.

“Tesco keeps falling into the trap of linking value with price. Aldi is cheap and a simple shop to navigate. Tesco is too big, with too much choice, with too many rewards and loyalty card schemes.

“It needs to sharpen their pricing needs to be further progress on the in-store experience and a lot of that comes from the number of staff they employ.

“The reason Tesco first over took Sainsbury was because it put the shopper at the heart of the business with its ‘Every little helps’ campaign. Now, it seems, they are putting their shareholders first.”

Do you have a business story? Contact business writer Ben Woods on 01603 772 426 or email ben.woods@archant.co.uk

5 comments

  • Question. "What next for Tesco". ? Answer. Raise prices, and more pricing scams. Thats what they always do, isnt it.

    Add your comment | Report this comment

    "V"

    Thursday, April 17, 2014

  • Lots of people avoid Tesco because they demand planning permission against local opinion and threatening local businesses. I'd like to think that people voting with their feet would make the Tesco bosses think again: antagonising locals doesn't work.

    Add your comment | Report this comment

    Lise

    Thursday, April 17, 2014

  • But it's a profits slump and no business in today's world likes a profits slump.

    Add your comment | Report this comment

    Old Long Balls

    Thursday, April 17, 2014

  • OLB, they made a whopping £3.05 BILLION in pre-tax profits !

    Add your comment | Report this comment

    GoodRockinDaddy

    Wednesday, April 16, 2014

  • That's what happens when you ignore the most important part of your business, yes the customer.

    Add your comment | Report this comment

    Old Long Balls

    Wednesday, April 16, 2014

The views expressed in the above comments do not necessarily reflect the views of this site

ADVERTISEMENT

ADVERTISEMENT

Most read business stories

Tony Fernandes. Picture: Press Association

Crunch talks underway at Caterham to decide Norfolk firm’s future

Bosses at automotive group Caterham are locked in crunch talks to determine the fate of its business in Norfolk, the EDP understands.

Read full story »

loading...

ADVERTISEMENT

ADVERTISEMENT