Tesco: Will the Turnaround Moves Work?

Tesco (TSCDY) is going through an overhaul of management and strategy after a horrendous 18 months with competition from fast-growing discounters Aldi and Lidl, coupled with an accounting scandal, driving it to a record annual loss of £6.38 billion in the last financial year. However, to the relief of the investors, Tesco announced that its sales in the recent quarter (March to May) has improved with just a 1.3% fall in like-for-like UK sales compared with the 1.7% decline registered in the previous quarter.

Also, there was an increase in like-for-like volume sales by 1.4% during those three months indicating that the new CEO Dave Lewis's turnaround plan is starting to have an impact.

Tesco’s international sales performance has also improved in the last quarter.

It has made investments in fresh food and in core groceries in each of our Asian markets where it has been well received by the customers. But the like-for-like sales in its two largest markets, Korea and Thailand, declined by just over 3 % and 2 % respectively.

In Central Europe and Turkey, Tesco continued positive like-for-like sales growth as a whole. The company has formed a single, regional team here by restructuring the teams for each country. This has helped created substantial synergies to be re-invested in the customer offer.

Change of Plans:

Tesco has stopped to go ahead with some of its previously announced expansion plans over the last few years in a bid to cut costs and turn around the fortunes of the ailing company. It has abandoned 62 planned stores in the past five years. This is three times greater than many new supermarket sites that its rivals have put together. It would also be shutting down 43 unprofitable stores, putting 2,000 jobs on the line. The company will also soon part with its head office at Cheshunt.

Price cut has become such a necessity in this market that even a market leader like Tesco was forced to reduce prices on more than 300 additional products across the quarter which has given it an edge over its competitors. Tesco management is also stressing a lot on increasing availability of the offered range.

The UK Supermarket Industry

The supermarket industry of the United Kingdom is going through a rough patch of time. There has been a significant increase in the number of small and medium-sized food companies in the country in the recent time. The big four supermarkets of UK – Tesco, Asda, Sainsbury’s and Morrisons – have suffered with falling sales because of a change in the shoppers’ habits. Now the shoppers are increasingly preferring to visit smaller local shops and discounters frequently rather than going for weekly bulk buys. The result is that the big stores are now forced to anyhow retain their market share by offering unreasonable discounts to the shoppers at the cost of profits.

Tesco still at top

Despite a decline in sales revenue, Tesco leads the UK market with a 28.5% of its share for the 12 weeks ended 21 June. This indicates that the supermarket has increased its volume of items bought, as shoppers take advantage of savings and stock up on goods. But the growth for a few other retailers has been much higher over the same period. Dunnes Stores has grown by 6.3% while Lidl outperformed Dunnes Stores, with market-leading growth in sales of 6.4%. Sainsbury comes second with a 16.5% market share followed by Asda with 16.4%.

Conclusion

Despite all the internal improvements, business environment remains challenging and volatility is likely to remain a feature of short-term performance. Even its convenience stores are running out of steam as their sales are moderating. Tesco is doing its best to recover the business, but this is at the cost of margin. But at one nearby point in time Tesco will need to show its earnings power to attract investors.

Published on Sep 17, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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