Tesco culls one-third of product lines

<p>The company hoes to secure better deals with fewer partners to fund lower prices.</p>

Last week, Tesco saw the first benefits of a shake-up of its 3,000 British suppliers.

The supermarket giant recently instigated a number of new deals and changes to product ranges, helping to feed price reductions that drove down better than expected quarterly sales, reports Reuters.

However, the company says suppliers that survive the cull can expect a better deal.

Chief Executive Dave Lewis is trying to rebuild trust with suppliers  after a £263 million accounting scandal last year. Mr Lewis is reported to be cutting around one-third of Tesco's product lines and will be focussing on securing better deals with fewer suppliers in a bid to help fund lower prices.

Commenting on Tesco's plan, Gavin Darby, CEO of Premier Foods, which makes products like Mr Kipling cakes and Bisto gravy, told Reuters that he welcomes the new strategy.

"After 30-odd years in this industry, I have rarely seen an alignment of the stars in terms of where the big retailers are going and big branded manufacturers," Mr Darby said.

There's also good news for some own-label suppliers and producers like meat farmers – as they are also seeing traditional one-year agreements extended for three or five years as the supermarket attempts to strengthen partnerships.

However, the news is not so good for those being culled. Two notable brands that will no longer be found on Tesco shelves include Rachel's Organic yoghurt and AB Foods's Kingsmill bread.

Tesco investors are backing Mr Lewis and his plans to improve the company. Shares are up 14 per cent over the last six months. 

​The new strategy

In the past, suppliers to Tesco were often seen at a disadvantage, often making deals that were not to their benefit simply to maintain relationships with the UK's most powerful supermarket.

However, after Tesco's profit misstatement last year, this behaviour came under scrutiny.

​Mr Lewis has promised to move the company's emphasis to the front margin and slash back margin options by 2017 to just three that are common across the grocery industry. These are retrospective payments for achieving volume targets, payments for shelf promotions and compensation for product recalls.

Tesco stocks were down 2.7 per cent to 212.85 at 15:31.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.