Tesco‘s continuing difficulties in the UK forced the retailer to stun the City with something of a profit warning. As Chris Brook-Carter writes, the company needs to look beyond price to regain the ground lost to the likes of Sainsbury’s.

The warnings of a dire festive trading period in the UK throughout November and December were like the shrill tones of Noddy Holder screeching out Slade’s Merry Christmas Everybody ad infinitum in the run-up to the holidays: predictable and everywhere you turned. In both cases, by the time Christmas finally arrived, you were wishing the latest rendition would be the last you’d hear.

But for those who managed to block out the noise, yesterday (12 January) should have constituted a stark wake-up call. A slew of top UK retail names announced results that were everything from disappointing to the down-right ugly.

The ill winds that were blowing – and continue to cause problems – were always likely to cause some high-profile, but predictable, names to catch cold.

In food, the poor showing at Thorntons will come as no surprise to anyone who has followed the ailing chocolate group in recent times. However, news of a worse-than-expected 0.6% increase in sales over the 14 weeks to 7 January still led to its share value plunging to its lowest on record by the middle of the morning.

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Shares in Tesco fell by more than 15% after the retailer reported another fall in UK sales and warned profits would not grow as fast as expected in its current financial year and in the following 12 months. Its grim tidings dragged down the market value of Sainsbury’s, Marks and Spencer and Morrisons due to fears for the sector as a whole.

Before Tesco announced its Christmas trading update, its underlying UK sales had fallen for four successive quarters. The pressure of competing over Christmas led the retailer to admit that its annual trading profits would now be “around the low end” of market expectations. It also warned that the need to invest in its domestic business would weigh on annual profits in its next financial year.

So much was made in the last quarter of 2011 of the marketing battle between the UK’s largest grocers. In the end, efforts from all sides to convince consumers that they, and not their competitors, provided the best value for money descended into tit-for-tat. However, in hindsight, the three weeks in September and October that saw Tesco unveil its Big Price Drop and Sainsbury’s then counter with its Brand Match price comparison scheme was a pivotal moment in the run-up to Christmas.

Tesco has underlying issues that it simply must confront. “We…believe that as Tesco has grown larger, its operational control has become too loose,” Neil Saunders, of the retail research agency Conlumino, said. “Standards across the store estate are patchy at best and many stores simply do not deliver a good enough customer experience. This is especially so in general merchandise where product ranges in areas like clothing are not living up to the higher benchmarks set by competitors.”

But on the evidence of Tesco’s figures, and those of its Sainsbury’s, the Big Price Drop has also caused the UK’s largest retailer to stumble strategically in the short term.

Tesco’s message to consumers has been all about price. Back in October, as Brand Match versus Price Drop filled the media, Mike Coupe, Sainsbury’s commerical director, told just-food that he believed price was fast becoming a “non-competitive advantage”. As the price playing field levelled out, other imperatives would dictate consumer shopping choices, he argued.

Much to Tesco’s detriment, this appears to be exactly what has happened over Christmas.

Saunders said: “As results from Waitrose and Sainsbury’s have shown, this festive season was not about austerity; consumers were willing to trade up and sought quality and value rather than just low prices. Tesco’s marketing and promotion was not positioned to take best advantage of this.”

On Wednesday, Sainsbury’s chief executive Justin King unveiled net sales excluding fuel up by 4.5% in the 14 weeks to 7 January. Like-for-like sales excluding fuel increased 2.1%. While the UK’s third-largest grocer still has issues of its own – the tough trading environment it shares with everyone else and the on-going shadow cast by the Qatari stake to name two – its efforts to focus on a broader message have worked.

While its non-food range is boosting growth, albeit off a small base, the widening of both its food proposition – to include value and premium ranges – and its store formats have given it a more diverse appeal.

“That’s what we call universal appeal,” said King yesterday when questioned about Sainsbury’s position between the top and value ends. “Most customers, whether they’re on a very tight budget or they have got a little more to spend, they still want to get a deal, particularly on their brands and that’s why Brand Match has been powerful for us. But they also are not prepared to trade away from special occasions. We think that middle position, if done well, is the winning place to be. If you look at our data, over half of the shopping baskets that had Taste The Difference in had Basics in at the same time. Even within an individual shopping trip, customers are saving money on some items so they can get a treat on other items.”

Sainsbury’s challenge, of course, will be to carry this momentum into the New Year as consumers nurse their post-Christmas hangovers. Tesco CEO Philip Clarke, meanwhile, yesterday spoke boldly about the need for “step-change” in the group’s performance across “quality, range and service”.

Tesco, then, has bet too much on value for money and not enough on the values that should have defined the rest of its shopping experience. We may be on the brink of another recession, but the big grocers have got to move beyond price to retain shoppers, and that goes for Tesco in particular. It is one year since Sir Terry Leahy departed and Clarke will be under pressure to steer the group towards calmer waters.