Big retail names face challenge from discounters

A few years ago, nobody would have dreamed of asking that question, as the retailer reigned supreme and rivals were left floundering in its wake.

Although Tesco still heads the retail pack, its future is looking less rosy as the likes of Aldi and Lidl gain market share at an incredible rate.

Yesterday Tesco, as widely anticipated, recorded its worst UK sales drop in 40 years.

Tesco’s troubles are, to a certain extent, due to economic factors beyond its control.

British consumers are still tightening their belts, despite the more positive economic data.

They are trying to waste less by buying “little and often” in local convenience stores.

This means fewer people are heading to large out of town stores to conduct weekly shops, which is bad news for retail giants like Tesco. They are turning to discounters Aldi and Lidl for basics and Waitrose and Marks & Spencer for treats. Tesco is caught in the middle and has posted two straight years of profit decline.

With its key measurement of underlying sales at British stores down 3.8 per cent in its fiscal first quarter, Tesco’s CEO Philip Clarke is accelerating an investment programme to modernise stores. It is cutting prices to try to woo back shoppers and re-build long-term loyalty.

But with rivals Asda and Morrisons promising billions of pounds of price cuts, and Sainsbury’s vowing to remain competitive, some analysts think Tesco’s prices are still too high.

“The sustained under-performance is most clearly because its prices remain too high,” said Shore Capital analyst Clive Black.

“Tesco’s customer insight must be drumming up some crazy stuff if it is leading management to adopt its present strategy, which to our minds is clearly not working.”

Some believe that with Tesco’s UK market share still standing at 29 percent, nearly double its nearest rival, it should reassert its dominance by launching an all-out price war, which would hit earnings across the sector.

“Clarke’s only option now is to get out the big bazooka and blow the competition away,” said John Ibbotson, director of the retail consultants Retail Vision.

Although the first quarter outcome was not as bad as some analysts feared, after the release of weak market share data on Tuesday, one Tesco investor called the figures “shocking”.

“I find it difficult to see what the strategy actually is. It’s difficult to see how things are going to improve. They are trying to be too clever and please everybody but you can’t do that,” said the shareholder.

“They don’t seem to be concerning the Aldis and Lidls at one end or concerning Waitrose at the other. Despite the upbeat spin, sales are still woeful.”

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said investors needed to ponder whether Tesco is a company showing glimpses of revival or whether it is past its sell-by date.

It’s important to note that the discounters have a long way to go before they catch Tesco.

According to Kantar Worldpanel, Lidl achieved a record UK grocery market share of 3.6 per cent in

the latest 12-week period and its highest ever year-on-year sales growth, of 22.7 per cent. Similarly, Aldi’s sales were up by 35.9 per cent and the company retained the record 4.7 per cent market share it reached in the previous 12-weeks.

Today, the attention shifts to the top brass at Bradford-based Morrisons which is holding its AGM. Last month, Morrisons revealed that it was cutting 100 jobs in Yorkshire. The Bradford-based firm said disappointing Easter sales added to its woes. Morrisons’ chief executive, Dalton Philips, said: “It wasn’t a strong Easter for us.”

The news follows scathing comments about the current management by former property director Roger Owen, who likened the retailer to a “supertanker heading towards an iceberg”. Investors attending today’s meeting are likely to be just as outspoken.