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Trolley trouble

4 Dec 2013 By Robert Cole

Investors’ patience with Tesco, the UK’s largest supermarket operator, is justifiably wearing thin. Shares in the group rose in early trading on Dec. 4, as the company published third quarter sales figures. But that was probably because the numbers were no worse than expected. The stock price slipped back later in the day. Over the last two years Tesco shares have fallen 16 percent while the FTSE 100 has risen 17 percent.

The retailer says that the trading environment is tough, both at home and overseas. British GDP may have bounced in recent months but consumers, according to Tesco at least, came back from their summer holidays feeling decidedly short of cash. Overseas, the grocer has been hobbled by new restrictions on Sunday trading in South Korea while Thailand’s politico-economic turbulence pushed it off the growth path.

But Tesco will only restore its reputation as a reliable investment if it bucks market trends. In the UK, where it does two-thirds of its business, it is trying, with a 1 billion pound store investment programme. It is also adding more staff and changing the mix of products, especially on the non-food side. That includes dropping low-margin flat screen TVs, a decision that hurt third quarter sales.

Tesco’s top line is suffering from a slower pace of expansion. The more cautious approach also hurts like-for-like comparisons, since sales in new stores usually increase strongly for several years. Another drag is the slow pace of the ‘Building a Better Tesco’ refresh programme. After nearly two years, more than half the stores are awaiting makeovers. Tesco could cut prices to get the top line moving more quickly. It might have to. But it’s hard to be sure volume gains would compensate for the profit margin loss, especially in the perpetually competitive UK environment. All-out price wars are best avoided.

For shareholders, the biggest risk is that Tesco fails to contain the strains in its international businesses. In the UK, the turnaround is coming at a painfully slow pace, but there’s no obviously better alternative. The Tesco trolley has wonky wheels. But it’s not yet past its sell-by date.


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