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October 6, 2011

On the money: Suppliers could fund price cuts, admits Tesco

Tesco CEO Philip Clarke has admitted suppliers could be asked to fund the retailer's new promotional strategy.

By Dean Best

Tesco CEO Philip Clarke has admitted suppliers could be asked to fund the retailer’s new promotional strategy.

Food manufacturers have expressed concern that they could be affected by Tesco’s Big Price Drop campaign, which the retailer has claimed will lead to price cuts of GBP500m.

Tesco has said it would fund the cuts through a change to its Clubcard loyalty scheme and via various “productivity” initiatives.

However, speaking to just-food yesterday (5 October), Clarke said the retailer’s suppliers could be asked to absorb some of the cost of the programme.

“Where we feel their margins have got unnecessarily high, there could be some negotiation,” Clarke said. However, he insisted: “It’s not the first thing to do.”

Clarke was speaking on the sidelines of Tesco’s press conference on its half-year results. The retailer reported higher first-half profits, boosted by growth overseas but it reported a fall in UK sales. Tesco said its UK like-for-like sales, excluding fuel and VAT, dipped 0.5% in the six months to 27 August. Sales were down 0.9% in the second quarter.

Tesco’s results came on the same day as a trading update from rival UK retailer Sainsbury’s, which has questioned how much money its larger competitor is really investing in the Big Price Drop, saying the initiative represented “smoke and mirrors”.

Speaking to reporters earlier in the day, Sainsbury’s chief executive Justin King expressed confidence that his company could compete with Tesco and said much of its rival’s new strategy had been seen before.

However, Clarke insisted the Big Price Drop represented a “real reduction in prices” and would have an impact on Tesco’s profits in the second half of the year.

He said: “There was over GBP300m that we were spending in doubling the value of Clubcard. We’re stopping that in three weeks time. If that GBP300m was going straight to the bottom line, our profits wouldn’t be broadly flat in the second half of the year. Half of GBP300m is GBP150m. Where’s that going? It’s going into prices in the second half of the year. We have an ongoing programme of productivity and we’re putting that into prices. It’s a real reduction in pricing. There’s no smoke and there aren’t any mirrors.”

Clarke said the new programme comprised the “most significant changes to our pricing and promotions strategy for many years”. He added: “These [price cuts] are reducing the cost of the nation’s shopping list.”

Tesco’s results were announced on the day that the UK’s GDP figures were revised down from growth of 0.2% to 0.1%, according to the Office of National Statistics. Data from the ONS also showed that household consumption fell 0.8% in volume terms between April and June. At current prices, consumption was up 0.1% but slowed from the 1.2% seen in the first quarter of the year.

Clarke, as chief executive of the UK’s largest retailer, was asked about his prognosis of the UK economy. He looked back to the late 1980s and early 1990s, when interest rates were high. “It was pretty tough then. It feels about like that” he said. However, Clarke acknowledged the situation was different now. “With the global economic system, every time you open a newspaper, consumers are constantly reminded that things could be very difficult next week. What we have to do is help customers in any way we can and that’s why our Price Drop in the UK is important for us.”

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