Tesco is launching an incremental investment of GBP200m (US$333.9m) to drive prices down on “essential” items as the UK’s largest retailer tries improve its performance in its domestic market.
Speaking during an investor presentation this afternoon (25 February), Tesco management said it plans to quicken the pace of improvement in its core UK business by positioning itself more competitively.
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Cheif executive Philip Clarke acknowledged Tesco has lost ground to competitors in the UK, notably the discounters Aldi and Lidl. According to his assessment, the key to the success of the discount sector has been its ability to deliver stable, low prices – rather than relying on promotional pricing policies. The strategy has paid off in the ongoing down consumer environment, Clarke suggested.
“The squeeze continues. Less affluent consumers and middle-income families are being forced to make choices. Consmers are yet to benefit from the emerging recovery,” Clarke stressed.
In order to appeal to cash-strapped consumers, Tesco plans to change its pricing policy from one reliant on promotions to one that delivers stable, reliably low prices, Chris Bush, MD of the retailer’s UK business, told analysts.
“Pricing in the UK market has been too volatile for too long,” he insisted. “Today I am committing to lower more stable prices on the everyday products that matter most… We intend to shift some of our promotional investment into putting more money on lower more stable pricing.”
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By GlobalDataHe added: “Apart from the discounters, no-one is doing a good job on [price] stability.”
Bush said he cannot predict whether the move will spark a fresh price war among the UK multiples but added that the Tesco Price Guarantee, which gives consumers money off future shops if their purchases would have been cheaper elsewhere, should provide consumers with confidence to shop at Tesco.
While pricing is important, Bush emphasised that, in order to remain a “broad church” that appeals to all socio-demographic groups, Tesco cannot take its eye off service and quality.
Management emphasised the progress Tesco has made on its own label and increasing service levels in stores since the group launched a turnaround strategy for its domestic operations.
Tesco is also quickening the pace of its store refurbishment programme and aims to have upgraded its entire store portfolio by 2017.
“We are accelerating growth in new channels we are investing to ensure we emerge as winners in this new era [of retailing].”
However, Clarke conceded previous attempts to reposition Tesco failed to bear fruit. “We did launch the Big Price Drop in 2011 and I think everyone knows that it wasn’t executed particularly well…. We are trying to change an organisation’s fundamental approach to pricing, range, quality and service and that has taken us more time than we thought to be candid.”
The chief executive acknowledged the group’s headline numbers “have not been what we would want” but he remained upbeat on the group’s ability to generate top-line growth in the UK in the “medium term”.
While Tesco stabilises its core on the one hand, on the other it is investing in expanding in the growth areas for UK retail – convenience and online. The company is developing its multichannel capabilities to deliver a “seamless” experience that enables the customer to shop as and how they choose.
Key areas of investment for Tesco include expanding its multichannel and convenience offering, Clarke added.
“The retail world – our consumers – are changing more quickly than ever before… We see many more opportunities for the long term and uniquely we are placed to lead… we have strong positions in convenience, online and digital. We have build an amazingly broad range of brands and businesses across the UK,” Clarke said. “New technology will enable more seamless connections.”
Even as Tesco is increasing its investment in developing its UK proposition, the group is reducing its capital expenditure programme. Capex will be capped at GBP2.5bn a year for the next three years, the company revealed.
This will be achieved through a dramatic reduction in space expansion in both the UK and overseas, as well as margin and efficiency improvements, Tesco said.
