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Expert opinion: Tesco profit falls 6%

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Tesco’s business has taken a hit for the third year in a row as group level profits fell 6 per cent to £3.3bn in the year to 22 February while it posted a fall in its China and European arm.

The retailer is investing heavily into its multi-channel and customer data strategy and recently announced a £200m round of price cuts to stave off pressure from Aldi and Lidl.

As shoppers turn away from big stores and shop in convenience stores, Tesco have sub-let space to gym operators and discount department store Original Factory Shop in its largest stores.

Here’s what the experts made of the results:

Bryan Roberts, Retail Insights Director, Kantar Retail EMEA.

“While the decline in profitability and like-for-like UK sales comes as no surprise, it marks the end of a disappointing year for Tesco. Philip Clarke is coming in for a lot of harsh criticism from assorted commentators and ex-colleagues, but we hope that this is the end of the beginning rather than the beginning of the end for his tenure. He has made some tough but necessary decisions on international in particular, but there is still much to be done, in Ireland and Central & Eastern Europe in particular.

“In the UK, the two missing ingredients are clarity and consistency. The proposition, particularly in pricing, is muddled and confused. Tesco doesn’t necessarily need to have the lowest prices to recover – instead its pricing needs more clarity, predictability and transparency.

“Instore standards and execution are incredibly haphazard. Some Tesco stores, in and around London especially, are in the finest shape we’ve seen, while others around the UK are mediocre at best. While there is a lot of great work being completed by Tesco in areas such as online, convenience, digital and London, we are still awaiting some genuinely transformative efforts to regain momentum in Tesco’s mainstream supermarkets across the UK as a whole. Putting shoppers, rather than shareholders, back at the heart of the business would be a good starting point.”

Danielle Pinnington, Managing Director, Shoppercentric.

“Today’s Tesco news isn’t to be unexpected because such a big turnaround was needed and this takes time - especially with the discounters continuing to redefine the market. It isn’t simply a case of reclaiming old ground, but of working out the new landscape and defining which part of it is up for grabs. Despite the headline news however - there are glimmers of hope with the newly refurbished stores actually showing sales growth, and it’s extremely refreshing to hear a chief executive talk so openly and candidly about the need to differentiate beyond price alone.

Shoppers these days are of course constantly bemoaning the price of food, so no doubt that price wars in general will help their cause…but in isolation, they are unlikely to help individual retailers as all price wars do is encourage shopping around and disloyal shopping behaviour. No surprise then that Tesco’s latest price initiative doesn’t seem to have taken shoppers by storm, and that there is much still to do to define and own a point of differentiation that will tap into shoppers’ needs.

In addition the lack of impact of the new price initiative reinforces suspicions of a continuing disconnect between Tesco and shoppers – despite the fact Tesco has the treasure trove of Dunnhumby data at its fingertips. So are Tesco really listening to shoppers and finding solutions to their needs, or just coming up with ideas based on Tesco’s own business needs?

With so much choice now available shoppers are not just being savvy about price, but also savvy about where and when they shop. They are picking and choosing the stores that suit them based on their needs as individuals, whether it is about lowest price, best quality, best value or a really enjoyable shopping experience. Retailers who work on a one size fits all approach are losing out. They need to flex their business and their stores to meet the needs of a whole range of shoppers, rather than attempt to satisfy everyone with a standard approach. And that means a big shift in strategy for someone like Tesco – and big shifts not only take effort, but time and commitment.”

David Gray, Retail Analyst at Planet Retail.

“Today’s results show retailing goliath Tesco is still struggling to maintain momentum both at home and abroad. Against a trading backcloth of like-for-like declines around the world, the business has also been beset with a string of management changes, including the planned departure of veteran Finance Director Laurie McIlwee. Stability among the senior management team is seriously lacking and with waters so choppy, a much firmer hand is needed on the tiller.

“At home, the figures were disappointing as Tesco continues to toil between the rock of the discounters and the hard place of negative volume growth in the UK grocery market as a whole. Firmer measures will be needed to rectify the situation – including more product innovation, a faster rate of store refurbishments and extension of the investment in Clubcard Fuel Save. Short term measures will not provide the necessary platform for a long-term turnaround. Nor is investment in price the panacea many believe it to be. Sales in international were also soft although at least a proportion of the blame falls at the door of factors beyond Tesco’s control – political unrest in Thailand; onerous regulation on store opening hours in Korea; and challenging economic conditions in CEE and Turkey (where the situation has worsened in recent months).

“But despite this short term pain, markets such as Thailand and India continue to offer long term reward. The case for Turkey is perhaps less convincing. With sales in Turkey under pressure, we believe the time is ripe for Tesco to consider a tie-up with a local player – as it has already done in China with CRE. Migros Ticaret seems the logical choice – with the combined hypothetical entity generating sales of an estimated TRL10 billion (USD4.8 billion) and holding the number two position in the market. Tesco’s current market position (just TRL2.4 billion [USD1.2 billion] in sales) pales in comparison.

“Tesco may have the turning circle of the Titanic, but hopefully the parallels end there.”

Published on Wednesday 16 April by Editorial Assistant

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