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The City is losing faith in Tesco

The financial crisis has reshaped many sectors in the UK, but perhaps the longest lasting effect could be in the supermarket sector. This could be bad news for Tesco, which is expected to issue a gloomy trading update on Wednesday.

Garry white employee

by
Garry White

in Features

02.12.2013

The financial crisis has reshaped many sectors in the UK, but perhaps the longest lasting effect could be in the supermarket sector. This could be bad news for Tesco, which is expected to issue a gloomy trading update on Wednesday.

Over the weekend, Lidl boss Ronny Gottschlich said in an interview that he wanted to target “Maidstone mums” who are no longer afraid to be seen in a Lidl store. The German discounter plans to exploit the fact that the embarrassment factor has gone for middle class shoppers looking for good value. He wants to expand Aldi’s UK stores from the current 600 to around 1,500.

Of course, discount retailers such as Aldi and Lidl only have a small part of the market, but they are growing rapidly. The latest data from market watcher Kantar Worldpanel showed that although Aldi’s market share was just 3.9% in the 12 weeks ending November 10, the number of shoppers visiting its stores grew by 16% year-on-year. Lidl saw its sales rise 13.8% in just 12 months.

Analysts expect Tesco to report a fall of 1.5pc in sales at British stores open for more than a year in its third quarter. This would represent a slowdown in trading compared with the second quarter, where like-for-like sales were unchanged.

Anticipating this troublesome set of numbers, HSBC downgraded its rating on Tesco shares to “underweight” this morning. Analyst Dave McCarthy argued that the group was in a weaker position now than it was prior to its shock profit warning issued at the start of last year.

Mr McCarthy said he thought Tesco’s commitment to a 5.2% UK operating margin in its next financial year looked not only “a stretch” but it was the wrong strategy. Management should reduce the margin target to 2% to 3% to better compete with the discounters, he said.

"Tesco needs to make its offer compelling, needs to hurt its competitors and needs to rebuild. But before rebuilding comes demolition," Mr McCarthy noted.

Speculation is mounting that Tesco may have to slash prices further in order to not have a disastrous Christmas, so the strategy favoured by Mr McCarthy may be forced onto the group.  

But it must be remembered that Tesco still has a strong position, with a market share almost double that of nearest rival J Sainsbury. However, Sainsbury has been performing well in the last two years, as it focused on the changing habits of UK consumers.

Sainsbury management invested in convenience stores and its online operations as and called a halt to the end of the “race for space”.   The large out-of-town hypermarket model is now less attractive to consumers who buy their main shop online and then buy fresh food on a regular basis from their local store.

Another threat to Tesco dominance comes next year comes from Wm Morrison, whcich plans to launch its own home delivery service. This could hit the major players if Morrison offers good promotions to attract customers from rivals and executes the roll out well. 

Ocado is also making further inroads into value goods, unveiling an expansion of the number of products in its own-brand range. Own label now accounts for a significant 10% of Ocado’s sales.

Whether shoppers will continue to prioritise value in their weekly shop as the recovery takes hold remains to be seen, but the fact the concept of the “Maidstone mum” even exists suggests that this is possible.

In austere times, cheap really is cheerful. However, Aldi and Lidl’s success in convincing the middle classes that cheap doesn’t necessarily mean low quality has not brought Tesco much cheer.

Chief executive Philip Clarke needs to explain how he can invest in the company’s offering and still keep margins as high as 5.2%. The City does not believe that he can.  

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