Tesco FY and turnaround plan: what the analysts say
Tesco today (18 April) said it would spend GBP1bn (US$1.55bn) in a bid to revitalise its domestic operations as it confirmed that full-year like-for-like sales and profits in the UK have dropped. Nevertheless, its strong international business enabled the UK's largest retailer to book a 1.6% increase in pre-tax profit. While the disappointing UK performance held no surprises, details of the turnaround plan have been broadly welcomed by the market.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers
"Tesco has confessed and is now bearing down on the problem to hand. As reflected by a drifting market share and a plummeting share price, the company's previous focus on its domestic market had become blurred. Today's announced plans, if implemented successfully, could give the UK business the shot in the arm it needs to maintain its hitherto unassailable position. The headline group trading profit numbers encapsulate the current state of the business - showing growth overall, down in the UK and strongly ahead in the international businesses."
Matt Piner, lead consultant at Conlumino
"These numbers are broadly as expected and, while far from disastrous, have exposed signs of weakness in a business that just a few years ago seemed to be an unstoppable beast. We are also starting to see more details emerging of how Phil Clarke plans to put the business back on the right track. The largest shift is undoubtedly the heralding of the end of the 'race for space'. Tesco's expansion and land grabs were essential in its rise to the top, so any move away from this is highly significant.... Tesco is reining in UK space growth and switching focus to improving existing stores, with a target of refreshing 430 outlets in 2012/13. These improvements will revolve around making the shopping journey more experiential and enjoyable, rather than the rather soulless, big box, environments that many of its larger stores provide."
Clive Black and Darren Shirley, analysts at Shore Capital
"Shore Capital welcomes the focus on the UK business around six themes set out by management. These themes are largely in-line with our expectations, so a focus on fresh food, more welcoming stores and better activity all round - prices & promotions, modernised brands and improved customer communication. These changes involve a broad continuum of pricing strategy to our minds augmented by more staff, the prime factor behind margin contraction in the UK in 2012/13. Management has set out a plan to modernise 430 stores in 2012/13 at a cost of cGBP500m (US$798.4m), c25% of UK space; trials to date have delivered measured sales uplifts of 1.2% a control group."
Himanshu Pal, senior Tesco analyst, Kantar Retail
Tesco's news about declining UK profit and like-for-like sales has not come as a surprise. There has been a clear lack of investment in stores and staff for the last couple of years, and the retailer now trails several competitors in terms of fresh food offer, customer service, and in-store standards.
"It is a daunting challenge to turn around Tesco's fortunes in the UK, but the plans Philip Clarke announced today are likely to help the market leader get back on track. However, those expecting an overnight recovery will be disappointed. It only takes one shopping trip to disappoint a customer, but it takes much longer to change perceptions and regain shoppers' trust.
"Despite Tesco's underperformance, Kantar Retail urges a greater sense of perspective. Tesco is not on its knees, just off the boil. It is still far and away the UK's leading retailer; it remains the leader in a variety of areas such as online retail; it has been highly innovative in nascent areas such as 'click and collect' grocery and its margins are still double those of most competitors.
"It is also worth remembering that, although Tesco has encountered problems in its home market, its global growth has surpassed many of its international competitors. In all likelihood, the company is set to become the world's second largest retailer within the next five years, bumping Carrefour into third place."
Jon Copestake, retail analyst at the Economist Intelligence Unit
"The continued loss of share to the likes of Asda and Sainsbury signals a need for Tesco to address significant challenges in its domestic market. That said, many strategies unveiled are not new and it seems that, rather than innovating, Clarke's prime focus for Tesco is a 'back to basics' attempt to re-engage with consumers having taken its eye off the ball in recent years. To this end store facelifts, re-launching the value range and focussing on customer satisfaction are hardly radical concepts. Equally seeking a new marketing approach and extending successful schemes like click and collect are also not new ideas.
"However, it is in the online space where Tesco's domestic strategy may become interesting. Speculation has mounted that Tesco is seeking to challenge "pure play" retailers such as Amazon. Allowing third-party sellers into its online marketplace could be an important asset in improving choice and availability for web-savvy shoppers.
"The scale of Clarke's commitment is probably telling and the size of the investment certainly indicates a strong commitment to recapture lost share. In this Clarke may have taken something of a gamble. Given the general weakness in the UK market, embattled consumers are still likely to favour price over the renewed service that Clarke is seeking to focus on. Equally, the domestic focus could be spurning much greater retail opportunities in fast-growing emerging markets where Tesco has enjoyed comparative success. Global competitors have recently set their sights on new markets in Asia, Sub-Saharan Africa and Latin America, with a special focus on easing restrictions in India. Some may ask whether GBP1bn might have gone further in these markets."
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