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January 13, 2012

What the analysts say – City verdict on Tesco

Tesco's trading update - which included another fall in UK sales - and a forecast for weak profit growth in its next financial year sent shockwaves through the City and the wider UK economy. Here, leading analysts run the rule over Tesco.

By Dean Best

Tesco’s trading update – which included another fall in UK sales – and a forecast for weak profit growth in its next financial year sent shockwaves through the City and the wider UK economy. Here, leading analysts run the rule over Tesco.

“Unfortunately the ‘big price drop’ reported in this update will be remembered as more reflective of the shares than the campaign. The lowering of prices did drive higher sales, but the pressure on margins rendered the promotion unsuccessful. Meanwhile, Tesco’s competitors had rather more success over the period, the outlook remains threatening and the company has been forced into something of a profits warning for the year. However, while disappointing, all is not lost. The international businesses continued to make a worthwhile contribution, whilst the growth in the UK of over 14% bodes well, particularly given the fact that this could become an area of further focus for the group” – Richard Hunter, head of equities, Hargreaves Lansdown Stockbrokers.

“Since Kantar data has shown Tesco’s UK business underperforming the UK grocery market for several years it perhaps should come as little surprise that it needs to do something to reinvigorate its growth. However, the magnitude of the rebasing – approaching 70bps of UK trading margin – comes as a surprise. Tesco’s plans to invest more in the non-price elements of its UK shopping experience and temper the growth of bigger formats in the UK, in our view, are sound commercial decisions to maintain long-term profitable growth. We see a clear negative read-across for Sainsbury’s and Morrisons. To the extent that Tesco’s actions drive better UK sales growth, competitors will need to decide whether to accept lower share – potentially leading to operating deleverage  – or more directly invest margin to match Tesco’s moves. Since the primary focus of Tesco’s actions is not price, the impact of the repositioning may not be felt immediately by competitors. However, over time as customers notice the broader changes to Tesco’s shopping experience the pressure will build” – Sanford Bernstein senior analyst Christopher Hogbin.

“All things considered, this is a miserly set of results from Tesco which come against very easy comparisons last year. In our view the poor figures are driven by a more competitive market, an ineffectual marketing effort and a lack of attention to detail in merchandising and stores. As a competitive and marketing tactic Tesco has chosen to fight its battle on the issue of price. We believe that this was the wrong headline message over Christmas. 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. There is no denying that Tesco is a phenomenal business and these results do nothing to take away from that. However, Tesco is now in a much tougher phase of its development where it will need to work much, much harder if it is to extend its market share” – Neil Saunders, MD of retail analysts Conlumino.

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