Tesco revealed an improved performance in its UK like-for-likes this morning. Retail Week takes a look at how chief executive Philip Clarke’s £1bn strategy to revive the domestic business is faring.
On the face of it, Tesco’s under pressure boss appears to have stemmed the tide of like-for-like decline by returning the business to growth in its vital domestic market. Like-for-likes were up marginally, by 0.1% in the 13 weeks to August 25.
However, significant levels of discounting and promotional couponing have been the primary driver of a like-for-like performance which is ostensibly flat against what was a poor result in the same period last year, when like-for-likes fell 0.9%.
The 11.6% plunge in first half profits has been largely put down to the £1bn investment plan, however some of this may also be attributable to a significant investment in margin.
Conlumino analyst Neil Saunders said today that couponing was simply “a short-term solution that treats the symptoms of Tesco’s illness but does very little in the way of offering a permanent cure”.
Tesco’s key issues – paying for space in large stores it doesn’t need, losing share to the discounters and its mainstream rivals, and battling consumer conditions which Clarke last week claimed are as bad as he’s ever seen – remain longstanding.
As ever, Tesco remains heavily involved in a war for shopper spend with on song archrivals Asda and Sainsbury’s as well as discounter Aldi which this week reported rocketing full-year profits. This battle will intensify as Christmas fast approaches.
Sainsbury’s this morning revealed a solid 0.9% increase in like-for-likes - excluding additional space in existing stores - in the second quarter, although Tesco will be more cheered by Morrisons’ recent performance which has been off the pace against wider market growth.
Clarke may have hoped for some let up internationally to allow him to focus on the UK market, however tough consumer spending conditions and changes to opening hours regulations in South Korea have interrupted its long-term growth story.
There remains a long way to go before Tesco can be regarded as a company on the up again.
But that’s not to say Clarke’s strategy is the wrong one. The retailer is improving store standards and many of the areas identified –service, replenishment in its fresh departments, the balance of food and non-food and better counter services – are the key issues the grocer needed to tackle, even if many of the changes have simply brought its estate up to the standard of its rivals.
However, Tesco’s investors will need to remain patient as the changes made in store begin to take effect. In the meantime, Tesco may look to further rely on its biggest advantage – scale - to improve performance and win shoppers. Leveraging its impressive buying power and its stores in almost every UK town, Tesco is able to both lower prices and get its message across quickly and effectively.
Kantar Retail insights director Bryan Roberts believes underperformance in the UK “may well have bottomed out”. But he added: “These are early days”.
Roberts said that “Tesco’s recent problems are likely to be seen as an unfortunate blip” in the fullness of time and points out that the grocer’s market leading position in rolling out click and collect services, developing a digital offer and bringing technology in store are all likely to pay off long term.
Today’s results evidence the first Bambi-like steps of Tesco’s attempts to win back the hearts of a nation that, to some extent, has become disenfranchised by its tired offer.
But let’s not forget, Tesco remains almost twice the size of its main rivals and the most profitable UK grocer, and Clarke will be quietly pleased with the first few hundred yards of a very long road to recovery.
Tesco profits fall 11.6% despite Q2 sales growth
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