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December 9, 2013

Best bits: Little sign of challenges easing for Tesco

This coming March, Philip Clarke will have been Tesco CEO for three years. It has been a challenging period and, at least in the short term, there is unlikely to be any let up.

By Dean Best

Tesco’s latest quarterly sales update made for more uncomfortable reading for the UK retail giant last week.

Like-for-like sales in the 13 weeks to 23 November fell in each of Tesco’s ten markets.

There were three countries in which the sales decline was less steep than the previous quarter but, nonetheless, the period was another challenging one for Tesco.

In the UK, where LFLs were down 1.6%, Tesco has become caught between the continued strength of discounters Aldi and Lidl and the ongoing success of more upmarket grocers Sainsbury’s and Waitrose.

One cannot deny Tesco CEO Philip Clarke has set about trying to inject the company’s domestic arm with a sense of urgency and the business has undertaken a series of initiatives – from refreshing product ranges and refurbishing stores to investing in online and mobile – but, as yet, the efforts have yet to bear fruit.

Clarke has indicated it will take time for Tesco’s moves to pay off but already some in the City are questioning the retailer’s strategy.

Announcing its third-quarter sales, Tesco said its UK business had suffered amid “a weaker grocery market”. Not every analyst accepted that conclusion. “It is our view that the deterioration is not simply caused by the transformation having a short term drag on sales, but this is symptomatic of the turnaround not working. After 18 months of the plan A not working, we think the management team should consider its alternatives,” Sanford Bernstein analysts Bruno Monteyne and Richard Clarke wrote after the results were published.

Tesco’s major UK grocery rivals are already rolling up their sleeves to fight harder, particularly in an area Clarke is seeking to position Tesco ahead of the competition – multichannel.

Next month, Morrisons will at last launch a home delivery service through a tie-up with digital specialist Ocado – and it has set out ambitions to grow the business quickly.

Perhaps more pertinent for Tesco in the short term is Asda’s plans to step up investment in further developing its multichannel business. Asda said last month it was, for example, looking to set up over 1,000 click-and-collect locations around the UK. Wal-Mart’s UK arm wants to increase the “physical access” to the Asda “brand” from 53% to 70% by 2018.

Tesco’s share of the UK online grocery market is higher than its portion of the overall pie but its competitors are looking to sharpen their act. Clarke has set out his stall for Tesco to lead in the development of a multichannel retailer and hopes it could be a point of difference for the retailer. He will have his work cut out.

Outside the UK, while Tesco could point to macro factors in some markets (regulation in South Korea), its performance remains in the doldrums, particularly in Ireland, where sales were down a whopping 8% in the quarter.

Tesco has launched its Price Promise comparison scheme across the Irish Sea in a bid to win back custom from rivals but, as in the UK, there is little sign the likes of Lidl are losing steam, with the German giant opening more stores in Dublin this week.

This coming March, Clarke will have been Tesco CEO for three years. It has been a challenging period and, at least in the short term, there is unlikely to be any let up.

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