Tesco's high prices a strategy to meet profit targets

Tue, May 12, 2009, 01:00

SUPERMARKET GIANT Tesco charged high prices in its Irish stores at the start of the year in order to achieve profit targets, according to a confidential draft business plan seen by The Irish Times.

The UK multiple then lowered them from March on in preparation for a price war against competitors, the plan shows.

It has made up to 100 staff at its Irish headquarters in Dún Laoghaire redundant, and plans a similar number of layoffs as head office functions are moved to the UK and other overseas locations, The Irish Timesunderstands.

As reported in this newspaper yesterday, the plan states that Tesco’s profit margin in Ireland was 9.3 per cent last year, significantly higher than in the rest of the company. Last year’s profits were €248 million and this year’s profits are projected to rise to €255 million.

Yesterday, the company in a statement acknowledged that the document had been drawn up internally within the Irish operation but claimed that much of it was inaccurate and out of date.

However, the statement did not specify in which respect the document was allegedly inaccurate. Questioned about this, a company spokesman declined to elaborate.

The Tesco statement said: “The reports in today’s Irish Timesare based on a draft planning document containing information, much of which is inaccurate and now out-of-date.

“The position outlined in the report does not reflect the current business position, particularly following the excellent customer response to our investment last week in reducing 12,500 prices in 11 Border stores and other nationwide price reductions.”

Tesco last week announced average price reductions of 22 per cent on the goods in the 11 Border stores.

The document, which sets out the retailer’s plan to stem the tide of cross-Border shopping and win market share from competitors, shows that the across-the-board reduction in prices is under 10 per cent.

The draft plan was drawn up in mid-February, just before the end of the 2008/2009 financial year for the company, which runs up to the end of February.

It states: “Prices at the end of 2008 have been high (to achieve year-end profit numbers) and the downward adjustments in week one required to return to our target pricing are already built into our model for 2009/2010.”

The document shows that Tesco’s current price promotion is being funded by a “war chest” from savings made by buying cheaper goods directly from the UK. This has led to complaints from Irish suppliers that local brands are being disadvantaged in the new store layouts offering lower prices.

Tesco has been telling some Irish suppliers it wants cost prices reduced by up to 20 per cent to match rival brands from the UK.

Asked about these claims, a Tesco spokesman said last week that the shelf space given to all products was in accordance with customer demand. “We are in ongoing discussions with our suppliers, who recognise they need to align their price with customers’ new expectations,” he said. Asked about the scaling-down of the Irish headquarters of the company, the spokesman said Tesco was constantly reviewing its operations and there would always be a purchasing function in Ireland.

Minister for Foreign Affairs Micheál Martin said yesterday that consumers wanted to see large numbers of native products on the shelves of large supermarket chains.

Speaking at the turning-of-the-sod ceremony for the construction of Aldi’s €100 million distribution centre at Mitchelstown, Co Cork, Mr Martin said he was confident consumers would continue to call for the sourcing of increased numbers of Irish products in supermarkets in this country.