After ceo Philip Clarke’s announcement at an investors day yesterday (February 26) that Tesco would invest £200M a year in lowering prices, Shore Capital analyst Clive Black said: “Tesco UK had scope to be more aggressive on this front, taking the opportunity to press harder on the grocery discount channel’s price points in particular...”
Commenting in an analyst note, Black said he had “noted" Clarke's praise and respect for Aldi, Lidl and Waitrose. “In time, we harbour a nervousness that an opportunity may have been missed to be seen as ‘the shoppers’ champion’ at this juncture noting that Tesco has broad appeal that needs careful management.”
Tesco’s investment constitutes less than half of the £500M figure it spent on its 2011 Big Price Drop. It said it would pay for the price cut drive by shifting cash away from expansion and promotions.
Like most traditional UK supermarkets, Tesco is facing heavy price pressure from discounters Aldi and Lidl, which have benefited from shoppers’ drive to cut bills in the current harsh economic climate.
Black also questioned the lack of clarity of management on how Tesco’s future profits would perform.
Tesco stated that by “delivering the most compelling offer across all channels, it is focusing on increasing loyalty – Clubcard remains part of the proposition – and improving sales, leading to sustainable profits and returns over the medium term”.
‘Uncertain’
But Black commented: “...We are uncertain, with the withdrawal of guidance given on December 4 2013 for 2014/15, where management thinking is on UK profitability and whether or not ‘sustainable profits’ mean higher profits.”
“Small but persistent cuts” to profit and earnings forecasts for Tesco had eroded investor confidence, he said. As a result, he advised investors to wait for an end to such downgrades in the retailer’s performance before investing in it.
A Morgan Stanley Research note from Edouard Aubin also highlighted Tesco’s “acknowledgement that it was exposed to structurally challenged formats” at the investors day.
“The company disclosed for the first time its like-for-like (LFL) sales by business lines, noting that at Christmas, large stores posted a -3.1% decline, while UK LFL sales were down -2.1%, Express stores’ LFL were up +1% and online sales were up +10%.”
Tesco acknowledged large out-of-town stores were being hit by a consumer shift to online and convenience channels, said Aubin.
‘Unclear’
The retailer announced plans to increase the pace of larger store revamps and declared aims to finish the 300 remaining stores by 2017. “However, it is as yet unclear how the company plans to resolve the above-mentioned structural issue,” said Aubin.
Despite reservations in these areas, Black said there could be “grounds for encouragement” in Tesco's strong food and non-food online sales. “From a low base Blinkbox grew by 245% at Christmas 2013, online clothing by 70%, online GM [general merchandise] 25% and online grocery 10%.”
He also hailed Tesco.com’s grocery sales of £2.5bn, generating pre-tax profit of £127M, as “putting to shame Ocado's derisory return on sales in our view”.
“..Tesco’s profitable grocery business suggests huge implicit value within the group if one extrapolates Ocado’s inflated current market value to the UK’s leading online food business,” he said.
Black also welcomed Tesco’s aim to improve product quality through better new product development (NPD), a further review of its fresh produce range, stronger convenience ranges and greater focus on social trends.
He also hailed its promises of stronger food and non-food ranges, better customer service and cuts in annual capital expenditure to £2.5bn for at least three years, with greater focus on convenience, online and store refreshment.
- At the recent City Food Lecture at London's Guildhall, Charles Wilson, ceo of UK wholesale giant Booker, urged suppliers to ditch supermarkets, claiming after many successful years their growth was slowing down.