Every little helps

Thu, Jul 24, 2014, 01:00

Every little helps is the Tesco philosophy, and Tesco now needs every help it can get, as sales decline, as its chief executive Philip Clarke departs, and as the company issues yet another profit warning. Britain’s biggest retailer is losing customers and market share fast. Increasingly, price-conscious consumers operating on tight budgets have switched to discount retailers to fill their shopping baskets. And Tesco, which since 1919 has filled the post of chief executive from within its ranks, has had to look outside. It has appointed a top Unilever executive as Mr Clarke’s successor to help revive the company.

Tesco’s steady earnings decline is easily explained: first, greater competition in the UK market that it dominates; and second, a very poor investment record overseas, where the company has sought to diversify its retail operations. In the UK, as in Ireland, it has faced – but failed to meet – a similar challenge: how to compete with the German discounters Aldi and Lidl, which both operate to a simple formula. As niche retailers, they offer low prices and good quality on a much smaller range of goods. As such, they supply some, though not all, of the needs of shoppers who, since the recession, have become more discriminating on price and value, and who shop in multiple retail outlets and online for their purchases.

In retailing, size matters, and size should help a company’s development and increase its pricing power. But in Tesco’s case, size may have impeded its growth. The company built too many hyper stores in the UK, when consumers no longer much favoured them, and it misjudged the US market with its major investment there. Tesco’s sales difficulties are going to force a major change, which should have come sooner. And most likely this will involve more aggressive pricing to recover some of the market lost to the German discounters that have been happily eating Tesco’s lunch. Consumers will certainly welcome a price war and greater competition, which will also help keep inflation in check.

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