The EU debate - Part III

[Tobes]

Their model and Tesco's problems preceded brexit, which has added to an existing situation.

Last year, MT noted that Dave Lewis was faced with a crucial strategic dilemma: cut costs to fix Tesco’s wayward financials, or invest in the brand to restore customer love. Lewis listened to his inner FD, rather than his inner CMO, and set about closing unprofitable stores, selling non-core businesses like South Korea’s Homeplus and cutting Tesco’s considerable product range.

It was the right call, at the time. The pay-off is that Tesco’s 2015 full-year results show a return to pre-tax profit (just) - £163m, compared to a £6.3bn loss in 2014. That frankly horrific figure was directly caused by impairments on Tesco’s property assets, but behind that was the decline in sales and prices as German low-cost rivals Aldi and Lidl waged a successful price war against the Big Four, snatching considerable market share in the process.

Lewis has managed to arrest one of those declines – like-for-like sales finally rose (by 0.9% in the UK) in the fourth quarter to February 27 on growing volumes – but has had no such success with the other. The price of a basket of goods at Tesco is now 4% lower than last year, Lewis confirmed.

This deflation is the straight jacket that Lewis has to wear and the reason he will be unable to restore Tesco to the glories of its halcyon days. Four years ago, Tesco was posting profits of £4bn, but with the price war destroying its margins, such figures are now impossible.

Crucially, there’s no good reason to expect conditions to become more favourable in the future. Aldi and Lidl are growing their store counts rapidly, which means if anything competition is going to increase. Tesco has been thoroughly and permanently outflanked on price – unless he can come up with something new with which to tempt customers back to the shrinking middle market in which Tesco sits, Lewis will be unable to deliver anything other than negligible sales growth off razor thin margins.

It comes back to the dilemma he faced when he first took the helm last year – brand or budget. Cutting costs has averted the crisis and is likely to remain a feature of Lewis’ strategy, but it will never be enough to regain Tesco’s lost market share. Low costs are built into Aldi and Lidl’s business models in a way Tesco can never match.

Now that the profit loss account has been appeased, the emphasis is instead likely to fall on getting more people to choose Tesco. There are signs of it already with the launch of Tesco’s budget ‘farm ranges’, an own brand marketing device straight out the Lidl playbook.

Making a meaningful change to Tesco’s proposition will require much more than that, however – and no matter how Lewis decides to approach the problem, it will almost certainly require serious time and money, two things he really doesn’t have. ‘We have to invest in our business in a time when the market is deflating and there are some significant challenges ahead,’ Lewisadmitted to the BBC.

Investors hoping for a dramatic turnaround in the near future – or more specifically a return to the good old dividend days – are likely to be disappointed as a result. Tesco stock fell 5.6% by lunchtime to 185p – up from its December nadir, but still only half what it was worth three years ago.



Read more at http://www.managementtoday.co.uk/da...mma-tesco/article/1390979#E1chu2F2ZDIdJPUr.99

Tesco have been ****ed since Leahy left

Aldi's model rose off the back of the recession, in recent times their continued growth has been due to attracting a broader segment of the market, by increasing their quality.

 

[DMD]

Tesco have been ****ed since Leahy left

Aldi's model rose off the back of the recession, in recent times their continued growth has been due to attracting a broader segment of the market, by increasing their quality.

Yep, it's been going on for quite some time.

 

[Tobes]

People like Aldi, Poundland, etc, work on extremely low margins. It won't be long before they're forced to raise prices to remain profitable....

That's a given mate.

The latter might have to become £2 pound land

Aldi will do alright out of it though, their market share will increase and they'll be able to pass on price hikes on a level playing field with the big 4

 

[Star of David Bardsley]

I won't pretend to know loads about the situation but I have sympathy with Tesco on this. When I worked for a company supplying Tesco, our selling price to them was agreed at least six months in advance while our procurement was mostly from abroad and could be affected positively or negatively by all sorts but as a supplier we had to take the rough with the smooth, bought currency well in advance etc. as Unilever presumably do.

 

[Tobes]

I won't pretend to know loads about the situation but I have sympathy with Tesco on this. When I worked for a company supplying Tesco, our selling price to them was agreed at least six months in advance while our procurement was mostly from abroad and could be affected positively or negatively by all sorts but as a supplier we had to take the rough with the smooth, bought currency well in advance etc. as Unilever presumably do.

Unilevers deal with Tesco obviously runs by the quarter, which is why they've had this disagreement at the start of Q4.

 

[Star of David Bardsley]

Unilevers deal with Tesco obviously runs by the quarter, which is why they've had this disagreement at the start of Q4.

Fair enough. I only caught a snippet on the radio this morning and read a bit of The Metro on the train. In that case, there should be a bit of leeway from Tesco but it wouldn't surprise me if Unilever are using it as an excuse to bump up revenue from products less affected by currency fluctuations. Will be interesting to see how it works out. I think Unilever need Tesco more than vice versa but they clearly need each other quite a lot.

 

[DMD]

I think the tesco issue highlights one of the problems with the current system, and brexit is a symptom more than an overall cause. Other economies are struggling and wars are waging due to it, brexit ir no brexit.

 

[Stan]

I reckon this is what Dull listens to in his bedsit

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[NSIS]

Despite what may or may not be happening elsewhere, 99% of the UK's current turmoil and economic meltdown can be laid directly at Brexit's door!
The markets, the vast majority of the economic community, and virtually all businesses consider it a giant step backwards.

 

[Star of David Bardsley]

I think the tesco issue highlights one of the problems with the current system, and brexit is a symptom more than an overall cause. Other economies are struggling and wars are waging due to it, brexit ir no brexit.

Brexit is a massive catalyst.

What's the alternative to "the system"?

 

[Stan]

Brexit is a massive catalyst.

What's the alternative to "the system"?

The Sensible Party.

Free KFC for all Englanders.

 

[DMD]

Brexit is a massive catalyst.

What's the alternative to "the system"?

An alternative is what a fair few economic experts are discussing as they feel history shows us that the current one is built on debt and poverty, and unsustainable. Brexit related events are a localised symptom of that.

It needs something that sheds the wealth and opportunities better, which will probably mean most of us have to give.

 

[Star of David Bardsley]

An alternative is what a fair few economic experts are discussing as they feel history shows us that the current one is built on debt and poverty, and unsustainable. Brexit related events are a localised symptom of that.

It needs something that sheds the wealth and opportunities better, which will probably mean most of us have to give.

Do you have a link?

Has Socialism ever worked for a sustained period of time?

 

[pieguts]

Unilevers deal with Tesco obviously runs by the quarter, which is why they've had this disagreement at the start of Q4.

Unilever deal is annual Tobes, but all the main suppliers to Tescos are in continued discussions as it goes far deeper than just unit cost. I could bore you to death for hours over Tesos relationships with the large suppliers. The only thing I will say is that de-listing of products and these kind of stand offs with regard to commercial discussions are pretty normal.
And no , I don't work for Unilever!

 

[pieguts]

Fair enough. I only caught a snippet on the radio this morning and read a bit of The Metro on the train. In that case, there should be a bit of leeway from Tesco but it wouldn't surprise me if Unilever are using it as an excuse to bump up revenue from products less affected by currency fluctuations. Will be interesting to see how it works out. I think Unilever need Tesco more than vice versa but they clearly need each other quite a lot.

I think Unilever are trying it on with their demands, but this is normal with the big suppliers and supermarkets such as Tesco.
However, it's the other way round for who needs who. The supermarkets need the branded products, so a deal will be done.

 

[Archers Road]

Longer term perhaps, but at present, their model has left them better positioned.

They're discounters, so they'll always benefit in difficult economic times. They'll still have to protect their margins though, which means either higher prices for consumers, or squeezing more out of their suppliers. Either way, the collapse in the pound is going to cause a lot of people a lot of pain.

 

[DMD]

Do you have a link?

Has Socialism ever worked for a sustained period of time?

I linked something earlier on, but sadly it seems to have got swamped.

I'v read differing views on the effectiveness, and even if socialism has ever been tried in reality.

 

[Star of David Bardsley]

I think Unilever are trying it on with their demands, but this is normal with the big suppliers and supermarkets such as Tesco.
However, it's the other way round for who needs who. The supermarkets need the branded products, so a deal will be done.

I'd have thought it depends on the brand. Tesco's share of the grocery market is 28% and most Unilever brands are replaceable with competitor products. Are people loyal enough to the likes of Ben & Jerry's and Marmite that they'd switch their regular shop to a less convenient other supermarket?

 

[DMD]

Despite what may or may not be happening elsewhere, 99% of the UK's current turmoil and economic meltdown can be laid directly at Brexit's door!
The markets, the vast majority of the economic community, and virtually all businesses consider it a giant step backwards.

Obviously, I disagree with the 99% claim, but it's academic.

Given that brexit hasn't yet started, and so far it's just words, the links to falling pounds and sundry doom and gloom simply reinforce my view that the current economic system is flawed, unsustainable and in need of a radical overhaul.

 

[Stan]

I'd have thought it depends on the brand. Tesco's share of the grocery market is 28% and most Unilever brands are replaceable with competitor products. Are people loyal enough to the likes of Ben & Jerry's and Marmite that they'd switch their regular shop to a less convenient other supermarket?

Is there an alternative to Marmite?!

 

[Star of David Bardsley]

Is there an alternative to Marmite?!

That's the only one I could think of which doesn't have an obvious replacement. If you eat marmite you're frankly a bit of a wrong 'un though.