What next for Tesco after a second profits slump?
21:29 16 April 2014
There was a point in time when it seemed nothing could stop Tesco tightening its grip on the UK grocery market.
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.”
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