Evolution not revolution places Tesco in recovery room

Its ​three main rivals, Sainsbury’s, Asda and Morrisons, will ​be​ ​flinching at the prospect that Britain’s biggest retailer is turning around its fortunes.

Tesco’s fightback against the discounters helped UK like-for-like sales ​rise 0.9​ per cent​ in the second quarter​ - better than the 0.3 per cent rise in the previous quar​ter.​​

The company, which has more than ​a ​28 per​ ​cent share of the British grocery market, reported a 60 per​ ​cent rise in ​underlying ​operating profit​s​ of ​£​596​m for the six months to August​ 27, ​which was ​at the top end of analysts’ forecasts.

It said it was on track to deliver profit​s​ of ​£​1.2​bn for the full yea​r​ after the recovery in its sales at British stores strengthened in the second quarter.

Much of this improvement is down to chief executive Dave Lewis.

Analyst John Ibbotson ​at Retail Vision​ said:​ ​“The slickest thing about Dave Lewis’ approach has been its simplicity: reducing prices to regain competitiveness in the core UK business, rebuilding all-important customer trust and strengthening the balance sheet by selling off non-core operations and stores.

“To top it all off, Lewis has turned the Tesco tanker around against a backdrop of ruthless competition and broader food price deflation.

“Yes the turnaround has been slower than some would have liked, but let’s not forget that Tesco’s fall from grace was extreme.​“

​He points out that Tesco’s size will help, as it enables it to keep down prices for longer than its rivals.

“The ability to keep prices lower for longer in this market will give Tesco an all-important trump card over its competitors​,” he added.

Phil Dorrell, ​p​artner​ at ​Retail Remedy retail consultants​, said​ ​Tesco’s offer has not significantly changed, it has just evolved.

​“​Range rationalisation and flow of goods on the shop floor are simple changes, well executed​,” said Mr Dorrell.​

He added that​ price perception has been helped significantly with the ​launch of ​Tesco Farms brands​, its new, cheap fresh produce range​.

A​s Mr Dorrell points out, the grocers are entering the​ir​ golden quarter ​- the run-up to Christmas.

“​​Tesco will be up against a resurgent Morrisons, a wounded but not down Asda and a Sainsbury​‘​s armed with Argos​,” said Mr Dorrell​.

​“​Tesco will have room to push further on price if they need to and a rash of offers lined up ready to deploy. Dave Lewis projects confidence and confident he should be.​“​

Tesco’s improving underlying sales have come at the expense of profits. In this cut-throat market profits have to be sacrificed in order to maintain competitive edge.

This is something Leeds-based Asda has finally realised. Shoppers don’t give a hoot how much profit a company makes - they want quality at the cheapest prices​.