Cantillon: Tesco down but not out, probably

It is by now old news that Tesco’s margins in the Republic are higher than those in its other non-UK European markets, the rationale being that the retailer’s large scale here allows it to operate with lower fixed costs than might apply elsewhere.

Whether one accepts this as fair or not, the reality is that the group's Irish margins have more recently been on the decline. Tesco itself tends to be fairly cagey about such data, presenting little more than sales figures when it reports group results, as it did earlier this week.

For further detail and analysis, we look to specialist retail analysts such as Himanshu Pal, director of retail insights at Kantar Retail in London.

Tesco said its like-for-like sales were slightly down in the year to February 24th, while overall sales grew by 1.9 per cent to €3.15 billion. Pal reckons that Irish margins, once thought to be at 7 per cent, came in at about 4.8 per cent for the year, although he says this is an estimate.

While clearly lower than levels reached some years ago, this is still well above the average in Tesco’s non-European markets, which Pal reckons come in about 3.53 per cent. He reminds us that Ireland is the retailer’s third-largest international market and thus carries significant scale.

Pal says pressure on margins will remain in place, with the Irish margin unlikely to top 5 per cent over the coming few years. The bad news for consumers is that the reason for this is that we will remain subdued as long as the economy tips along the bottom.

Happily, he expects the retail landscape to pick up as we get closer to 2018 and (hopefully) sustainable growth. At that stage, Tesco’s problems in other international markets will probably have been solved and the company will be ready to allocate more funds to beefing up its Irish online offering and engaging in a bit more hardcore price competition.

For now though, expansion will be more modest. Pal reckons the company has pencilled in plans to expand its Irish footprint by some 9,000 sq ft this year, with this likely to equate to up to three Tesco Express store.

He also points out, however, that there can be a difference between what retailers say they’ll do and what they actually do.