Tesco is expected to reset its UK margins as it attempts to wrestle spend back and turn around its flagship business.
Bernstein Research analyst Bruno Monteyne said in a note that Tesco is likely to reduce its UK margin from 5.2% and that margins will drop 40 to 50 basis points.
Monteyne, who used to work for Tesco including as supply chain director for Asia, said that although the UK’s largest retailer plans to cut prices it will not initiate a price war with arch rival Asda. The note claims Tesco is 5% to 6% more expensive than Asda on brands.
Tesco’s 5.2% margin is the highest in the global grocery industry as the grocery giant leverages its economies of scale.
Tesco chief executive Philip Clarke said at the interim results in October that Tesco was comfortable to be “flexible” on margins.
Clarke told City analysts then: “It doesn’t have to be 5.2% for ever. It doesn’t have to be 5.5%.
“It might be 4.8%. It might be 5.5%. What we’re going to do is we’re going to make sure we’ve got the most compelling offer. And we expect to see our like-for-like sales improve over the mid-term.
“That’s what we’re about now, sustainable improvements in the business fit for a new era, which is the multi-channel era.”
Tesco is to host an investor day to update on its UK turnaround strategy on Tuesday.
Monteyne forecast that the retailer would provide analysts with a number of “diversion tactics” such as the sale of international assets including its Turkish arm, which is has been reported Tesco is considering partnering with a local player to run.
Monteyne urged Tesco to “be bolder, be faster…stretch and dominate the middle” and claimed it has “lost its differentiation”. He added: “Food is now underperforming non-food and appears to be in freefall. The turnaround is supposed to be food led, and therefore this is a worrying trend.”
HSBC analyst David McCarthy said: “We believe Tesco should undertake a major price repositioning. We believe that on-going like-for-like sales declines in a highly operationally-geared industry will result in margin erosion (as we have seen many times across the industry). Therefore, we believe that Tesco should undertake margin investment, as this is preferable to margin erosion.”
Exane BNP Paribas analyst John Kershaw said: “Lower UK margins will weigh on returns but sustainable cash flow matters more. We see it as illogical that Tesco and the UK quoted grocers spend c.2x depreciation on capex in a mature, multi-channel, industry. It irks investors. We model relatively modest capex reduction but think Tesco has scope to cut a further cGBP0.5bn from its UK capex in short order by cutting space opening.”
- Tesco has hired George Dymond, the Morrisons online executive who resigned last month just weeks after joining the grocer, as operations development director.