October 26 2014 Latest news:
Thursday, April 17, 2014
There was a point in time when it seemed nothing could stop Tesco tightening its grip on the UK grocery market.
But yesterday’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 a 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 lure customers back to its stores with a £500m cash injection that would transform its 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,
Yesterday, 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 in need of a more dramatic transformation if it is to claw back the customers it has lost elsewhere in the market.
And they have suggested that part of the problems could be 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 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 a 12,000 sq ft Aldi store. It is also a relatively stress free experience.”
While yesterday’s results may have been a nasty wake-up call for 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 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.
“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.”
How our supermarkets have fared
Discount chain Aldi recorded a record market share over the past year, according to research firm Kantar Worldpanel, rising by more than a third.
The company may still only have a share of 4.6pc in the UK, but the jump of 35.3pc in 12 months shows it is a force to be reckoned with.
Kantar director Edward Garner said: “Amid a challenging market backdrop, individual retailer growth might be expected to be restricted.
“This is certainly not the case for Aldi, which achieved its highest ever growth.”
Morrisons has suffered the most in the past year in the increasingly tough supermarket wars.
Research firm Kantar Worldpanel looked at spending for 12 weeks to March 30 compared to the same period a year ago.
Morrisons saw a slowdown in sales of 3.8pc and now holds an 11.1pc of the market share, down from 11.6pc last year.
The company has vowed to lower prices to fight off increasing pressure from the cut-price chains.
Premium grocer Waitrose – like the low cost retailers – saw a jump in its performance last year.
The company had five per cent of UK sales in the 12 weeks ending March 30 compared with 4.8pc
in the same period last year.
Waitrose still stands well behind its main rivals, but has been buoyed by the rise in its performance.
Asda reported sales growth over the past year – but remains in second place in terms of market share in the UK, and recently announced it will create up to 12,000 posts over the next five years.
The strategy of the UK supermarket chain has the potential to create the posts, its owner Wal-Mart said.
Asda has a 17.4pc market share and posted the most resilient performance of the “big four” in the past year.
Like its fellow low-cost retailer, Lidl experienced strong growth, according to the supermarket research.
It now accounts for 3.4pc of the market in the UK and is catching up with its rivals – and has also reported a record month of trading.
Over the last year, Lidl recorded a 17.2pc surge in sales as its share rose from 2.9 per cent over the same period in 2013.
Sainsbury’s also saw a fall in its sales in the latest supermarket comparison research.
It has been hit by fierce competition from cut-price rivals and saw a 1.7pc slide in sales over the past 12 months.
The drop has come as a blow to outgoing chief executive Justin King, who departs in July after an almost unblemished sales record at the retailer. Sainsbury’s is third in the league table of supermarkets when it comes to market share, with 16.5pc.
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