Who’s stabbed Tesco?
...asks Scot-Buzz editor Bill Jamieson
We name the blood-stained villain…
Its rise seemed unstoppable, its growth remorseless. But Tesco, the supermarket giant of the age, towering above all others, is in severe pain. It has stopped growing. Customers are deserting. Competitors are closing in. And profits are falling. Tesco has been badly wounded. It is bleeding sales and revenues.
Who, or what, has stuck in the knife?
Tomorrow it reports half yearly results for the half year to August 24. City analysts expect the group will have suffered a drop in like-for-like UK sales of between 0.4 per cent and 0.7 per cent. All the more galling for the group is that arch-rival Sainsbury will report a 1.8pc rise in like-for-like sales in a trading update for 16 weeks to September 28. The former master of the high street universe could be heading for a second year of falling profits. Last month it parted company with Nomura and JP Morgan Cazenove as its corporate brokers. Last week analysts at both houses warned that prospects for the shares could be worse than previously thought.
A store refreshment was supposed to address criticism of the group’s tired and tawdry look. It doesn’t appear to be working to plan.
Tesco is still a highly successful store with a market-leading profit margin of 5.2 per cent competitive pricing and ambitious plans to step up online business.
But the group is caught in a vicious pincer movement, its core cost-conscious customers being wrenched away by the likes of Aldi and Lidl while at the up-market end, it is losing business to the incredible onward march of Waitrose.
And what is the demonic force that has brought this double trouble to Tesco’s door?
Many and various are the contributors to Tesco’s tumbling fortunes. But arguably the most sinister is - the Bank of England policy of Quantitative Easing.
The injection of £395 billion of cheap money into the economy has had the effect of pushing up asset prices – shares, bonds and commercial property.
That’s been good for the holders of these assets – the “haves”, while doing little to nothing for the “have nots”. In fact, it has widened the inequality gap.
Data released last week from Kantar Worldpanel reveals that sales at budget supermarket Aldi are up a massive 32.7 per cent on last year, and rival Lidl grew an impressive 14.3 per cent. At the other end of the scale, upmarket Waitrose grew a very impressive 9.7per cent too.
A strange paradox?
Bengt Saelensminde, commentator on The Right Side financial website, explains it thus: “Essentially, both ends of the market are flying. The budget end is driven by necessity as family budgets creak, while the luxury end benefits from the feel-good factor from rising asset prices. Aldi and Lidl have between them managed to grab 11.5% of the grocery market. Their stripped down shops are popping up all over the country. And the upmarket Waitrose has 10.9%.”
As Edward Garner, director at market research outfit Kantar, says: “Strong performances by retailers at both ends of the market pose a significant challenge for the big four supermarkets… and is forcing the major supermarkets to compete for an ever-smaller middle ground. “So, there you have it – QE has led to more sales of high-end balsamic vinegar at Waitrose and discount cereals at Aldi”.
And Tesco finds itself the victim, caught in “the squeezed middle”.
It’s a compelling theory, albeit to be taken with a pinch of organic artisan sea salt. Tesco has had problems in its overseas operations. And it has also suffered by not being quicker off the mark in developing online retailing – though that is now being addressed.
And the explanation needs to accord greater emphasis than it does to the astonishing Waitrose story which defies everything we thought we understood about the recession and “the cost of living crisis”. Waitrose, part of the John Lewis partnership, has long been viewed as a niche retailer, confined in Scotland to the affluent glades of Morningside, connoisseurs of broken orange pekoe loose leaf tea and Madagascar vanilla.
Despite that “cost of living crisis” it is now undergoing the biggest expansion in its history. This year it has set its sights on opening up to ten new supermarkets and ten new 'little Waitrose' convenience shops to add to its current total of 300. It has seven stores in Scotland and aims to take this total to 20 by 2015. It has already opened in Stirling and Newton Mearns and has secured planning permission for a store in Milngavie, north of Glasgow. Officials at East Dunbartonshire Council, not surprisingly, advised against the new store. Local shoppers are cock-a-hoop. So, too are Scottish producers, as Waitrose prides itself on stocking locally sourced products such as Gigha halibut and Innis & Gunn beer.
Neither does the “cost of living crisis” appear to be holding back sales at the John Lewis parent. Indeed, ‘QE’ is boosting sales here as much as it is wounding Tesco.
Specifically, John Lewis sales were up 8.5% year-on-year in the week to 21 September, which followed a gain of 14.1% the previous week and was above the overall increase of 7.6% in the eight weeks trading to 21 September.
26 of the 37 John Lewis stores that were trading a year ago saw sales rise year-on-year in the week to 21 September. Meanwhile, online sales were up 22.7% year-on-year in the week to 21 September which was above the overall increase of 21.8% in the eight weeks trading to 21 September.
Waitrose sales were up by 6.5% year-on-year (excluding petrol) in the week to 21 September.
Nor does the “cost of living crisis” appear to be impacting on UK consumer confidence which hit a near six-year high in September.
"Along with record high employment,” says Global Insight economist Howard Archer, “the further marked rise in consumer confidence in September boosts hopes that consumers will spend at a healthy clip in the fourth quarter and thus help the economy sustain its improvement despite the squeeze on purchasing power currently coming from inflation running well above earnings growth.”
For the moment, it’s a story of two ends against the middle. And the middle, as Tesco is finding out, is a most painful place to be.
