It’s a far cry from the £4bn Tesco earned 5 years ago but it is still a very healthy improvement on last years profit in a grocery landscape that has changed almost beyond recognition.
In order to compete in this climate David Lewis has adopted a multi-pronged strategy: product ranging, cost cutting and market penetration.
The introduction of entry level sub-branding was designed to compete head on with the discounters: quality at good prices to deliver great value for money. Despite initial challenges, mostly by the press rather than actual customers, the sub-brands have found their place in customer’s baskets and a comfortable market share. Such it the range success, further products are being added. On their own, however, they are not enough to dent the discounter’s market share.
The need to compete without going head to head on price sets Tesco apart (and ahead) of Morrisons and Asda. Cost cutting through switching to twilight rather than night filling gives Tesco room to manoeuvre although the effect of this hasn’t been without it’s negatives. On our recent visits we have noticed availability issues coupled with a slip in the standard of presentation.
Cost cutting looks to have a continued focus this year given the drop in the number of 24 hour stores so we will be looking for Tesco to improve standards if they are to maintain customer service. Currently this feels like an area in which Tesco are exposed.
The other strategic move is market penetration and the proposed acquisition of Bookers. There are some hurdles to overcome here, namely some heavy weight shareholder resistance who are concerned by the price, how distracting it is from the core UK business and how difficult it will be to create shareholder value from the deal.
In our opinion this is a good longer term strategy for Tesco. It will result in increased buying power and adds a revenue stream from day 1. If the deal fails to progress a gap will be exposed in cost saving synergies already planned and there will inevitably be a trail of debris to be cleaned up, distracting resource that should be focused on moving forward.
Further out, we are still expecting a move back to overseas markets for Tesco. Now is not the right time for far to many reasons but depending on the pace of change nationally and a signed deal with Booker, we would still expect this to be within a 5 year outlook.
What is clear is Tesco is a retailer with its finger on the pulse of the UK grocery sector. There may be bumps in the road ahead but these are manageable when you have a clear sense of direction and a team that is fuelling the engine. Even the discounters are watching their backs.