Tesco steps up its turnaround

<p>As tough conditions persist, Tesco signals that the company is ready to go a little bit further in a bid to drive customers back to […]</p>

As tough conditions persist, Tesco signals that the company is ready to go a little bit further in a bid to drive customers back to its stores.

The retailer, which hosted a seminar for investors and analysts on Tuesday, announced plans that it hopes will speed up the turnaround initiatives of its troubled UK business (UK contributes the bulk of its revenue – 66% in fiscal 2013).

Those plans include further scaling back on the number of new stores it’s set to open this year; and an investment of some £200m, which it will dedicate towards cutting prices on basic products.

Certainly, Tesco has had its fair share of issues over recent years, partly driven by tough competition from rivals. 

Most notable, of course, are the so-called discount retailers: the likes of Lidl and Aldi, which have been steadily gaining market share as cash-strapped customers gravitate towards their cheaper offering.

In the face of flagging sales, shrinking profit margins and a declining share price, Tesco embarked on a turnaround plan some two years back in a bid to differentiate itself and lure back customers.

Based on the ethos that good ‘customer experience’ would prevail, the company announced that it will cut back on opening new stores and instead channel some of the investment into the refurbishment of some of its stores.

Improving the customer experience, for Tesco, included ramping up the number of employees and opening up restaurants – the company even shelled out around £48m to acquire UK-based restaurant chain Giraffe in March last year.

Of course, following the company’s update last month on trading figures over the Christmas period, questions abound as to the merits of the retail heavyweight’s current strategy.  

With the company’s stock down around 3% on the back of its latest announcement, it seems those questions remain unanswered.

Well, it’s true that the company is in the second year of its attempt to reignite growth in its UK business, with no significant results as yet.  And the latest announcement simply seems in line with increasing momentum on its existing strategy.

But it bodes well that that the company is slowing down even more on new store openings. Let’s face it, the rise in online-grocery shopping looks set to continue.  And spending to maintain low prices on ‘everyday’ products can’t be a bad thing for the company.

Of course, it’s worth noting that those aforementioned rivals are not going anywhere and, as long as consumers’ purse strings remain tight, those players are likely to continue enjoying the benefits.

Still, it’s a step in the right direction. 

And, importantly, the fact that Tesco’s approach is based on a long-term view is quite clear.  It’s therefore arguably irrational to expect immediate results.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (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.