Blackfriar: There could be problems lurking in shadows for Tesco

The group’s shares fell nearly 6 per cent on concerns about future margins and that underlying sales growth slowed down in the group’s fourth quarter.

Analyst Nicholas Hyett at Hargreaves Lansdown said Tesco’s results confirmed a weak final quarter, which served to take the shine off a first year of positive like-for-like growth since 2009/10.

“With Aldi and Lidl applying constant pressure and Asda looking like it might be waking from its slumber, it seems there are still plenty of challenges ahead,” he said.

Many analysts have been waiting for Asda to launch a price war but so far little has happened. Maybe new boss Sean Clarke is biding his time.

Any price cuts would come at a time of huge upheaval for Britain’s supermarkets. Rising inflation, lower wage growth, more expensive imports and general worries about where the economy is headed are denting consumer confidence.

The latest Nielsen survey shows that the number of consumers who believe now is a good time to buy products has dropped 4 per cent to 49 per cent after reaching a 10-year high in the second half of 2016.

Out of 18 categories, the survey found that consumers expect price rises in every single category. Imported groceries are seen as the most likely to see price rises, followed by fuel prices, domestic groceries and transport. This is worrying news for all retailers, but grocery is by far the most cut-throat.

As Britain’s biggest retailer Tesco is in a good position, but it faces big challenges.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Operationally, Tesco is staging a recovery but it’s not out of the woods just yet.

“Imported food inflation is coming back into the system, which presents a challenge for supermarkets as the sector is so competitive that raising prices risks losing customers to cheaper rivals.

“That’s particularly the case given the squeeze on household budgets we are likely to see as prices generally rise on the back of weaker sterling and higher commodity prices.”

The big four supermarkets have learned from their mistakes.

When they hiked prices four or five years ago, Aldi and Lidl snuck in and stole their customers. They don’t want to make the same mistake again.

At a time when Yorkshire supermarkets Morrisons and Asda are focusing on their recoveries, some Tesco shareholders have questioned the wisdom of its proposed £3.7bn merger with Booker.

A number of investors have spoken out against the deal in recent weeks.

Mr Khalaf said: “With the sands of retail shifting, and Tesco only just starting to turn performance around, big questions hover over the proposed takeover of Booker Group.

“The logic for the deal lies in providing a growth engine for Tesco in the restaurant and hotels foods market, but investors are asking whether Tesco should walk before it starts to run.”

That said, Tesco’s closest rival Sainsbury’s took a bold step at a precarious time when it took over Home Retail Group, and to date that move has paid off, as Argos has been keeping group sales ticking over.

Analyst John Ibbotson of Retail Vision said: “The Booker deal, if it goes ahead, could prove decisive.

“It will help Tesco to keep costs and prices down for longer than its rivals, increase its margins, gain more exposure to the growing ‘out-of-home’ food market and grow all-important market share.

“The Booker deal is all about short-term pain for long-term gain.”

Mr Lewis has shown he knows what he is doing and the proposed Booker merger does not mean Tesco has taken its eye off the day-to-day business.

Maybe shareholders should have a little more faith in him.