Thursday 14 December 2017

It's tough surviving at the top, as Tesco profit warning shows

SOME 20-odd years ago, American property tycoon Donald Trump wrote a book called 'Surviving at the Top'. With such a pompous title, it was hardly a surprise that it came in for a lot of stick. One critic suggested there should be a contest to invent book titles that could equal it. One suggestion was 'Recovering from a Tendon Injury' by the lamented hero of the Trojan War, Achilles.

Sometimes, surviving at the top is a critical issue. It is certainly the case with the company I have chosen to examine today, Tesco.

The founder, Jack Cohen, starting selling from a market stall in Hackney, London, in 1919. The name Tesco was derived from his sugar supplier TE Stockell (TES) and CO came from Cohen. In 1947, Tesco was floated on the London Stock Exchange and today has 3,000 stores in the UK.

Giantism is the Tesco problem as it is the third biggest grocery chain in the world after Walmart and Carrefour (France). It has a market value of £27bn (€32.6bn), trades in 14 countries, has 6,350 stores, 520,000 employees, has sales of £64 bn, assets of £50bn, and net income of £2.8bn.

Big companies like this have a magnetic attraction for investors. They have that endearing quality of dependability, offering the prospect of some capital growth with stable and increasing dividends. Until, of course, they are considered to have gone ex-growth.

About 12 months ago, the retailing giant issued a profit warning, its first in 20 years. Tesco shares dropped from 400p in December 2011 to 288p in mid-2012. A newly appointed CEO, Philip Clarke, (he took over from his Liverpool-Irish predecessor Terry Leahy) has presided over the exiting from Japan, is reviewing its US operations (Fresh & Easy) and has warned that the outlook in central European markets is deteriorating. Tesco's Irish operations, with 139 stores and a turnover of some €3bn, appear to be holding up.

The health of the group is linked to the success of its UK operations, which account for more than two-thirds of the group's sales and profits. Tesco's UK market share is 30pc compared to its nearest competitor, Asda, with 18pc.

There has been a lot of analysis of the British grocery trade and the conclusions are that British consumer behaviour is changing. The statisticians have convinced themselves that growth in the future will come from online, from discount operations like Aldi and Lidl, and from convenience stores.

In these austere times, shoppers are looking for value. They are making fewer trips to supermarkets, hence the advantage of convenience stores. Given that consumer trends are changing, the market is even more difficult due to the intensity of competition.

Tesco strategy of covering all market segments having hypermarkets, supermarkets and convenience stores is being tested in a way that underlines the maddening unpredictability of business.

Tesco's new boss has designed a plan: 'Build a better Tesco.' He has also indicated management changes. However, repositioning a great edifice is tricky. One can never tell what 'supporting walls' can accidentally be knocked down in the process.

Some signs are good: Philip Clarke points to a 15pc increase in its online business and better-than-industry-standard food sales – but he is silent about the decline in non-food business.

Investors are pleased with the Christmas results, but they still have concerns. The profit warning still rankles. Does the problem of the non-food sales still exist? What is happening with consumer behaviour in the UK market?

Allowing for these concerns, it should be remembered that over the years investors have been well satisfied with their dividends and the share price has recovered.

Investor sentiment is not displeased with the exiting from some international markets. In fact, a retreat from a number of markets could not only stem losses but be a better use of capital.

Repositioning a giant company takes time; to quote a well-known phase, 'elephants don't turn quickly'. However, there is always the option of merging with Carrefour. Surviving at the top is not easy.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.

Irish Independent

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