Tesco…….has it regained its mojo?

Tesco’s Christmas and New Year trading statement released this morning indicates the UK market leader is beginning to show signs of recovery. In fact the +1.8% uplift in like-for-like sales was the strongest performance by the retailer for three years. This encouraging performance proves the UK turnaround plan implemented last year is slowly beginning to bear fruit – though there remains a long way for Tesco to go before it can comfortably say it has turned the corner.

In fact this performance has been somewhat flattered by the very soft comparatives during the same period last year, when UK like-for-like sales declined by 1.3%, acting as the catalyst for its first profits warning in more than 20 years. Tesco has flexed its financial muscle to be more aggressive on price and promotional activity –– and online sales rose 18% – aided by the growing popularity of its click-and-collect service, now available in 140 stores.

Focus on core market…

Despite Tesco having undertaken a substantial foray into the international arena – having established comprehensive operations in Eastern Europe and in Asia – the UK remains the key focus, particularly since it accounts for over two-thirds of sales and most of the Group’s profits.

Whilst the foray into the US was bold and ambitious, Tesco is having to eat humble pie as it retrenches from this market, following a very costly five years, during which it racked up losses of £850m. However, we believe this is a sound move and will only help to further strengthen its focus on the UK. The US foray has ended in a broadly similar vein to how Wal-mart exited the German market in 2006, when after 8 years and racking up pre-tax losses of $1bn, it decided to throw in the towel as it realised it could never become a viable force in the market.

Investing to differentiate its offer…

Tesco has historically demonstrated good judgement on picking up trends in the market and capitalising on them, in the form of strategic investments. The largest, and most compelling, to date was the £155m acquisition of garden centre chain Dobbies in 2008, which Tesco intends to grow to a £1bn business with over 100 stores.

More recently, Tesco has made small investments in London-based artisan bakery chain Euphorium and coffee chain Harris & Hoole. Both companies have considerable potential and there is a strong likelihood that Tesco will seek to eventually introduce them into its stores. (Euphorium already operates an in-store bakery in the grocer’s Kensington store).

Grocery is arguably the toughest retail sector of them all – and the need to offer a compelling and sufficiently differentiated offering is a key factor towards engendering customer loyalty. Tesco has been caught napping, but expect it to be back with a vengeance in the medium term.

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