After the second year of a profit decline, multinational grocer and general retailer Tesco (TESO) attempts to redeem itself, but is its CEO’s master plan enough to win back its customers’ hearts?
The retail giant (the world’s third largest) has a 6% profit drop in 2014, so far. With trading slowing down over the past 12 months, most of its British stores had a 3% drop in Q4 2013. CEO, Philip Clarke, is definitely under fire – since this decline was preceded by a two-decade growth period (most of it under the previous Chief Executive). He has some big shoes to fill, and his solution to this dull season is a price cut. Clarke is hoping that chopping millions of pounds off of prices will do the trick.
Breakingviews’ Robert Cole argues that Tesco should consider how aggressive it wants to be with its strategy:
“The big question they need to ask themselves is how aggressively they get involved in the price war. Numbers out today show that the trading margin in Tesco business was 5% last year. That’s, inevitably, going to come down because of some of the initiatives they’ve already taken. But I think the question they really need to ask is: Do they go in really, really hard on prices and re-establish Tesco as a proper value proposition?”
Challenges confront TESO on every end: failed attempts in the United States and Japan, an expensive China expansion and vicious competition on the home front. Store improvements and new services are eating up another billion pounds, but, luckily, these changes will help (and not harm) the business.
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What isn’t doing the company any good right now is the success of discounters Aldi and Lidl, as well as that of upmarket grocers Waitrose and Marks & Spencer.
In spite of being at a 10-year market share low, Kantar Worldpanel’s Edward Garner says TESO is still No. 1 is some sectors:
“There are areas where they are doing very strongly. Digital and omni channel. If you think about digital, they are the largest online grocer probably in the world, let alone this country. They have things like the Hudl, which is a tablet that takes you straight to Tesco and Blinkbox. So they have a very large digital footprint. And the idea being that you deal with Tesco in all sorts of environments. Large scale, small stores, online.”
Trading profits overseas are down in Asia and Europe by 5.6% and 28%, respectively. But this won’t deter the retail giant. In fact, TESO is leaping into the fashion industry – and it’s bringing F&F, its clothing brand, to the United States. Another shot at a game of “Sink or Swim,” and this time, Tesco needs to keep its head above water.
For a £23-billion company with 530,000 staff members to see such devastating results, people can only wonder if something is seriously off with the company’s direction or management.