Sales dip casts doubt on Tesco turnaround

Published Dec 5, 2013

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London - Tesco’s sales fell in Britain and abroad in the third quarter, casting fresh doubt over a £1 billion (R17bn) plan to reinvigorate the world’s third-biggest retailer.

The company, which trails France’s Carrefour and US leader Walmart in annual sales, blamed a weaker UK market since mid-year for the decline but said it was focusing on the long term and would not be drawn into a price war.

“For us it isn’t about market share over a quarter or a half. It’s about delivering a business which is sustainable,” chief executive Philip Clarke told reporters yesterday.

He said Tesco was focusing on being the leader in a new multi-channel era – selling a range of goods from bread to clothing and banking products from its stores and online – and pointed to sales of 300 000 of its own-brand Hudl tablet computers since its September launch, a number he expected would double over Christmas.

Tesco said it was performing in line with market expectations for its 2013/14 year, referring to a consensus forecast on its website last month. Since then, analysts including Tesco’s corporate brokers, Deutsche Bank and Barclays, have downgraded their forecasts.

Tesco, which makes about two thirds of its revenue in Britain, is 20 months into the UK turnaround plan and is pouring investment into store upgrades, extra staff, new product ranges and price initiatives.

Management has not given a deadline for completing the revamp, saying there will be no immediate payback from a project that will reposition the company for the next decade. Clarke said the plan “is very much on track”.

Phil Dorrell, the director of Retail Remedy, said: “The re-emergence of Tesco won’t happen overnight and some shareholders will lose patience with what is likely to be another year of mediocre results.”

Tesco’s recent share performance suggests some investors have given up waiting. After trading mostly in line with the FTSE 100 index since the start of the year, the stock decoupled from the benchmark in early September and is now largely unchanged on the year, with the FTSE up 11 percent.

It fell 1.6 percent to £3.36 by 1.30pm in London yesterday.

Some retail experts believe Tesco’s overhaul should have boosted top-line growth by now.

“It looked like Philip Clarke’s billion-pound turnaround plan was beginning to work but [yesterday’s] 1.5 percent fall in UK like-for-like sales will call this into question,” John Ibbotson, the director of Retail Vision, said. “This, together with declining sales in key overseas markets, will put Clarke and his senior management team under threat.”

Analysts have suggested Tesco should cut prices to reclaim lost market share, even if it means sacrificing some profitability for now. Tesco is determined to sustain a UK operating margin of 5.2 percent.

Clarke said the margin “isn’t holding us back” and that he was comfortable with it.

Sales at British stores open over a year, excluding fuel and VAT, fell 1.5 percent in the 13 weeks to November 23. That was in line with analyst forecasts of a fall of 1 percent to 2 percent but represented a deterioration from flat like-for-like sales in the second quarter.

Tesco, in common with Britain’s three other major grocers – Walmart’s Asda, J Sainsbury and Wm Morrison – is being squeezed by hard discounters Aldi and Lidl and upmarket grocers Waitrose and Marks & Spencer. – Reuters

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