Sunday, October 02, 2011

Tesco feeling poorly



From The Guardian 3 October 2011
Tesco is expected to reveal this week that it has suffered its worst six months in the UK for 20 years, as cash-strapped shoppers cut back on food, books, clothes and electrical goods.
In delivering first-half financial results on Wednesday, Britain's largest retailer will report its first fall in UK like-for-like sales – which exclude gains from new stores – since the early 1990s recession. In 1991, Sainsbury's was the UK's biggest supermarket chain, and it is also expected to report sluggish sales this week.
The figures will underline how even well-established supermarkets, usually regarded as the last high-street shops to suffer in a slowing economy, are struggling in the downturn.
Amid the government's austerity cuts, rising unemployment and falling real incomes, consumers are trading down to cheaper ranges and flocking to discount chains such as Aldi and Lidl. They are also buying less food, Peter Marks, the boss of the Co-operative Group, said recently, which sets this downturn apart from previous economic hard times.
To lure back shoppers, Tesco chief executive Philip Clarke, who took over from Sir Terry Leahy in March, has pledged to cut prices by between 10% and 30% on more than 3,000 products, mainly food. However, a survey on Sunday showed that the prices of Tesco's fastest-selling products had gone up by 12%, with only 10 of 97 items cheaper by more than 10% than in early August.
The supermarket, which controls nearly a third of Britain's grocery market, makes 20% of its UK sales in "discretionary" items such as clothes, electrical goods, books and DVDs. In the current downturn, consumers are cutting back on such spending, especially on big ticket items.
Electrical retailer Dixons has also been hit by the downturn, with UK sales slumping 10% in the quarter to 23 July. Many shoppers avoid buying anything that is non-essential, and some retail executives believe this Christmas could be the worst at the tills for decades.
City analysts expect Tesco to report a drop of nearly 1% in underlying UK sales in the six months to the end of August, but the rate of decline has been getting faster in recent weeks. Estimates for the final three months of the period are for falls of up to 2%. If the rate of food inflation were taken into account, the sales declines would be larger.
A Tesco spokesman declined to comment on the forecasts. He said other retailers envy Tesco's position and added: "This is a very successful company. The UK is not at its healthiest." Tesco operates in 14 countries. It is still forecast to increase its overall trading profit by 7% to £1.81bn for the first half, largely thanks to a strong performance from its overseas stores. However, it still makes more than 75% of its profits from its domestic market.
Retail analyst Jerome Samuel at HSBC said Tesco's growth has slowed rapidly, from 11% between 1997 and 2009 to 5.8% in the recent recession and 7.2% last year, but he added that the move into discretionary goods, together with the tough economic conditions, is hitting growth.
Analysts reckon Tesco's "price drop" campaign could trigger another supermarket price war. "We think this is not a one-off move from Tesco," said James Collins at Deutsche Bank, "and that we are likely to see more assertive action to which competitors are likely to feel the need to respond."
John Kershaw at Bank ofAmerica Merrill Lynch agreed: "Given the deterioration in the macro-backdrop, the outperformance of the discounters, and with Mr Clarke firmly ensconced in the role [of chief executive], we expect a more sustained effort to keep pricing close to Asda."
He expects Asda to respond if it is to stand behind its "10% cheaper" guarantee, and for Morrisons, Sainsbury's and Ocado to match at least some of Tesco's price cuts.
Tesco dates back to 1919, when Jack Cohen started selling surplus groceries from a market stall in London's East End. (The name uses the initials of a business colleague as well as the first two letters of his surname). It became Britain's biggest independent petrol retailer in 1991, and started its own organic range in 1992. The first Tesco Express opened in 1994, and the Clubcard was launched in 1995. Two years later, the chain branched out into banking, and clothing in 2002.
Sainsbury's, which sells proportionately more food and less homewares and clothing, is expected to post underlying sales growth of just 0.7% for the 16 weeks to 1 October.