Dean Best

Best bits: Tesco must look beyond Big Price Drop

By Dean Best | 12 December 2011

Tesco claims early results from the Big Price Drop - its campaign to lure cash-strapped shoppers and revive its UK sales - are positive. However, the view from The City was mixed after the retailer reported another quarter of falling sales in its domestic market. Dean Best believes Tesco should be given time - but competition from its rivals means the UK's largest retailer only has a certain amount of that.

"I'm pleased with the early progress but it's a medium-term strategy. It takes time to do."

Faced with questions over the impact Tesco's Big Price Drop promotional campaign had had on its UK business, CFO Laurie McIlwee, providing an update on trading in the retailer's fiscal third quarter, insisted industry watchers needed to give the strategy more time to really pay off.

"What we are trying to do is confirm with our customers that the core products you buy every day are going to be the cheapest at Tesco. That's a behavioural switch that takes time to do," McIlwee said. He pointed to "an improvement in our volume of about 1%" during the quarter and added that its volumes were growing two percentage points faster than its rivals. Kantar Worldpanel numbers published earlier in the week showed the Big Price Drop had helped Tesco increase the number of shoppers visiting its stores.

However, the price reductions Tesco made meant it saw its underlying UK sales fall once again in the third quarter to 26 November, prompting questions over whether the Big Price Drop campaign really was bearing fruit.

There was division in the City over Tesco's performance in the UK in its third quarter but, broadly speaking, most are willing to give Tesco more time on a campaign that was only launched in September.

The more patient pundits would be right to suspend judgement: Tesco is battling to lure shoppers in what are the most challenging trading conditions for at least 30 years. Consumer confidence is so low that food sales volumes have been under severe pressure and the squeeze on household budgets has led to a frenzied search for value - and eroded customer loyalty to any particular retailer. In these circumstances, Tesco does need time to make the Big Price Drop work.

However, in these trading conditions, Tesco only has so much time to work with. As McIlwee noted, the retailer's Big Price Drop created a "chain reaction" through the grocery sector, with Tesco's rivals either launching their own efforts or shouting even louder about the promotional campaigns they were already running to attract cash-strapped consumers.

The gloom over the outlook for the UK economy is showing no sign of lifting; competition is likely to only intensify in 2012 and, although Tesco remains far and away the UK's largest grocer, it has a battle on its hands. Asda, Sainsbury's and Morrisons will not suddenly ease up next year. The Big Price Drop has to be just the first weapon fired by Tesco in the battle for UK consumers.

Sectors: Financials, Retail

Companies: Tesco, Asda, Sainsbury’s, Morrisons

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