Katy Askew

What the analysts say: City view of Tesco FY and turnaround plan

By Katy Askew | 18 April 2012

Tesco today (18 April) said that it would spend GBP1bn (US$1.55bn) in a bid to revitalise its domestic business as it confirmed that full-year like-for-like sales and profits in the UK have dropped. Nevertheless, a strong international performance enabled the UK's largest retailer to book a 1.6% increase in pre-tax profit. While the disappointing UK performance held no surprises, details on the turnaround plan have been broadly welcomed by the market. 

"Tesco has confessed and is now bearing down on the problem to hand. As reflected by a drifting market share and a plummeting share price, the company's previous focus on its domestic market had become blurred. Today's announced plans, if implemented successfully, could give the UK business the shot in the arm it needs to maintain its hitherto unassailable position. The headline group trading profit numbers encapsulate the current state of the business - showing growth overall, down in the UK and strongly ahead in the international businesses" - Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers

"These numbers are broadly as expected and, while far from disastrous, have exposed signs of weakness in a business that just a few years ago seemed to be an unstoppable beast. We are also starting to see more details emerging of how Phil Clarke plans to put the business back on the right track. The largest shift is undoubtedly the heralding of the end of the 'race for space'. Tesco's expansion and land grabs were essential in its rise to the top, so any move away from this is highly significant.... Tesco is reining in UK space growth and switching focus to improving existing stores, with a target of refreshing 430 outlets in 2012/13. These improvements will revolve around making the shopping journey more experiential and enjoyable, rather than the rather soulless, big box, environments that many of its larger stores provide" - Matt Piner, Lead Consultant at Conlumino 

"Shore Capital welcomes the focus on the UK business around six themes set out by management. These themes are largely in-line with our expectations, so a focus on fresh food, more welcoming stores and better activity all round - prices & promotions, modernised brands and improved customer communication. These changes involve a broad continuum of pricing strategy to our minds augmented by more staff, the prime factor behind margin contraction in the UK in 2012/13. Management has set out a plan to modernise 430 stores in 2012/13 at a cost of cGBP500m (US$798.4m), c25% of UK space; trials to date have delivered measured sales uplifts of 1.2% a control group" - Shore Capital analysts Clive Black and Darren Shirley  

"Many strategies unveiled are not new and it seems that, rather than innovating, Clarke's prime focus for Tesco is a 'back to basics' attempt to re-engage with consumers having taken its eye off the ball in recent years. To this end store facelifts, re-launching the value range and focussing on customer satisfaction are hardly radical concepts. Equally seeking a new marketing approach and extending successful schemes like click and collect are also not new ideas.... The scale of Clarke's commitment is probably telling and the size of the investment certainly indicates a strong commitment to recapture lost share. In this Clarke may have taken something of a gamble. Given the general weakness in the UK market, embattled consumers are still likely to favour price over the renewed service that Clarke is seeking to focus on. Equally, the domestic focus could be spurning much greater retail opportunities in fast-growing emerging markets" - Jon Copestake, retail analyst at the Economist Intelligence Unit  

Sectors: Financials, Retail

Companies: Tesco

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