Retail's difficulty is Tesco's opportunity to expand market share and increase profits in the Republic, the company believes. PAUL CULLENreports
“PROGRAMME SCALE” is the code-name used inside Tesco Ireland for its secret plan to stem the tide of cross-Border shopping, steal a march on its competitors and increase profits.
Under the plan, the company is “aligning” a large proportion of its commercial buying with the UK in order to access cheaper goods. This is being effected in two ways; saving money by cutting out middle-man distributors here in Ireland and taking advantage of the strength of the euro to buy goods priced in sterling.
The company has been demanding cost price reductions of about 20 per cent from Irish suppliers who compete against UK brands, which will produce further savings. Add to this various other cost-cutting measures, and Tesco aims to save almost €160 million for use as an investment “war chest”.
This year, the company plans to spend €141 million on price cuts, as in the “Change for Good” strategy unveiled last week, and another €30 million on promotions. The main aim is to remove the imperative behind cross-Border shopping. That’s why the strategy was rolled out first in 11 stores near the Border which were suffering most from the exodus of shoppers up north.
However, this isn't the only motivation behind Tesco's action, as the plan seen by The Irish Timesreveals.
With the retail market in the doldrums and its own market share declining, the company realises that the current difficulties present a unique opportunity to make up lost ground and put competitors under pressure.
As the name of the plan indicates, Tesco aims to use its vast size to drive efficiencies that smaller operators cannot match and to bleed dry their smaller promotional budgets.
Tesco plc is the third biggest retailer in the world in sales terms, and the second (after Walmart) in terms of profit. It is about 50 per cent larger than the Irish economy. Last year, it rang in about €2,000 of sales through its tills every second.
Tesco Ireland accounts for about one in every four euro we spend on groceries. None of its rivals can match the sophisticated distribution system it enjoys since a huge new distribution centre was opened in Donabate, north Dublin, two years ago. Now that it is plugging directly into the parent company’s channels in the UK, the economies of scale it enjoys are even greater.
The plan admits that Tesco was 0.5 per cent dearer than Dunnes Stores before the latest round of price cuts, but says the target is to be 2 per cent cheaper than its rival.
It acknowledges that customers are “flocking” to Northern Ireland to take advantage of price differentials of about 40 per cent and says that competitors are offering “extraordinary promotions” to protect their market share.
The plan, which was drawn up in February, envisaged using the war chest of accumulated savings to make price cuts of about 20 per cent on internationally branded goods. This is exactly the strategy unveiled last week with “Change for Good”.
However, the duration of these price cuts could be short-lived. As the plan admits, sourcing goods in the UK means that Tesco’s business in the Republic will be more sensitive to exchange rate movements and British cost prices. So if sterling strengthens, or inflation rises in the UK, the war chest starts to shrink and a re-think will be necessary.
For example, if the sterling/euro exchange rate moves from 1.15 to 1.45, the war chest will fall in size from €169 million to just €42 million. Currency hedging provides some protection, but the plan concedes that it is unlikely the full benefits of current exchange rates will be available for more than a year.
“If the full benefit of [Programme] Scale is put into price reductions in ’09/’10 it could give us a significant market share gain but we could be faced with the possibility of having to raise prices in ’10/’11,” the document states.
So while consumers have welcomed Tesco’s price move and competitors have followed the lead of the market leader by cutting their prices, the phenomenon could be short-lived.
Worse, Ireland could be even more exposed to the vicissitudes of currency fluctuations if existing distribution channels are broken up as a result of the trend towards direct importing.
By then, however, Tesco should have increased its share of the market and some of its competitors may be in difficulties. Indeed, some already are, with Superquinn laying off 400 staff and closing its Dundalk store and Dunnes Stores also closing (non-food) stores in Dundalk and Dublin.
Even with the massive spend from its war chest, Tesco is forecasting a 5 per cent drop in sales at existing stores, so the landscape must be even bleaker for its rivals. Not that we know; none of the big retailers publishes profit figures and secrecy remains a by-word of the industry.
