Supermarkets braced for battle - UK
Fin24 - Jan 19th 2015, 10:30
London - Four months into the job, Tesco boss Dave Lewis has wasted no time imposing a range of price cuts and customer service improvements designed to regain the initiative in a tough market. There are already signs customers are noticing.
Despite the series of shocks Tesco suffered in the past year, famously prompting billionaire investor Warren Buffett to admit buying into the stock was a huge mistake, it remains clear leader in its home market, lending it the clout to squeeze its "big four" rivals as well as upstart discounters Aldi and Lidl.
Given the success of those two brands, price is a key part of Lewis's revival strategy.
"Lewis will find a way to knock the life out of those discounters and it may feel like carnage for the next two years, but Tesco has too many powerful tools in its tool kit not to come out fighting," said an ex-Tesco UK director, who declined to be named.
While Tesco probably won't beat discounters on a full basket of goods, it can narrow the gap and match some items, and become more competitive.
Lewis will hope shoppers will be prepared to spend a little more overall so they can benefit from Tesco's bigger ranges, superior service, and online options not found at the discounters.
Tesco has already followed pre-Christmas price cuts on staples like vegetables with January reductions averaging 25% on 380 branded products.
The price of a pack of 80 Tetley teabags for example was cut to 1.99 pounds from 2.29 pounds, working out at 2.49p per bag. Aldi charges 2.25 pounds for a bag of 120 Tetley teabags, equating to 1.88p per bag.
Other cuts were more competitive. The price of a 750-gram pack of Kellogg's cornflakes was cut to £1.98 from £2.48, equating to 26.4p per 100 grams, slightly undercutting Aldi, which charges £2.65 for a 1kg pack, or 26.5p per 100g.
While all of the big players' sales declines were less than some expected over Christmas, it was Tesco's steadier showing that caught investors' eyes and delivered an ominous sign for rivals as it bids to recover from four profit warnings and an accounting scandal.
Having dropped 4.4% in the previous three months, its UK underlying sales fell just 0.5% in the Christmas period, helping its shares make their biggest one-day gain since 1988 after sliding by almost 50% in 2014.
Lewis's move to complement price cuts with more shop floor staff, which meant better-stocked shelves, shorter queuing times at the tills and tidier stores, helped deliver the better performance.
Tesco's fresh food volumes were positive over Christmas for the first time in five years, while industry data showed it outperformed the market in all product areas on a volume basis.
Cost savings, including head office job cuts and store closures, will help fund Lewis' plans. A further pruning of Tesco's sprawling product categories, as well as other complex work, is also on his agenda.
"We gleaned a small insight into a massive programme of work that can make Tesco sell more at a lower cost from a leaner supply chain," analyst Clive Black at brokerage Shore Capital said.
For its rivals, Tesco's more aggressive stance is increasing the pressure in an already tough market.
Britain's big four grocers, including Sainsbury, Wal-Mart's Asda and Morrison as well as Tesco, have been hit by seismic shifts in recent years.
The German discounters have raced to a combined market share of about 8.3%, sparking the big four to spend billions lowering the prices of staple items.
However, with anaemic overall growth in a £175bn market, someone must lose. Moreover, for all its recent disasters, Tesco is still by far the biggest player with a market share of around 30%, a position perhaps recognised by a stock market rating of 20 times forecast earnings, a 39% premium to its UK sector, according to Reuters’ data.
Sainsbury by contrast trades on just 12 times.
"It's a zero-sum game ... Numbers two, three and four are going to be hit with any Tesco resurgence," Fraser McKevitt at market researcher Kantar Worldpanel said of the big four, which hold a combined 75 percent of the UK market.
Even stellar growth at Aldi and Lidl, whose no-frills ranges have chimed with shoppers, may slow as their appeal is reduced by tumbling prices elsewhere.
Yet Lewis's strategy is not just about price.
In Tesco's toilet paper aisles, products and lines have nearly halved to increase space for top sellers. A subsequent mix of savings on storage, staff hours spent re-stocking shelves and simpler supplier deals have led to an 11 percent price cut for customers. Volumes sold have since jumped.
Price cuts on own-brand products are expected to follow, with savings in IT and logistics and 100 million pounds from a wage freeze. Small loss-making stores are being shut and expansion is slowing.
Tesco has even switched ad agencies to help rebuild its brand, though it has not yet said if it will ditch its dated red-and-blue logo and its "Every Little Helps" slogan used since 1992.
Lewis acknowledges he still has his work cut out.
"The period to Christmas was an encouraging first step," he said. "But nobody is under any illusion that we've got much, much more that we need to do."From Fin24.com
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