Humiliation at Tesco: big drop in share price shocks the City

NEARLY £5bn was wiped off the value of Tesco yesterday when Britain's biggest supermarket admitted it had suffered its worst Christmas in 20 years and warned that profits could fall this year. Shares closed down 16 per cent.

While shareholders react in shock, shoppers could end up benefitting, according to The Times. "The company is now likely to respond with lower prices, triggering competition among the supermarkets as they battle for business from cash-strapped households. Shares in rival grocers dived yesterday as the City braced itself for the reaction."

How did it happen?

Lack of quality. The company took its eye off the ball, focusing too much on the price of food and not on quality. "We now all expect high-quality food and everyone is claiming to be the cheapest," Natalie Berg of consultants Planet Retail told the London Evening Standard. As a result, shoppers are more wary. Sainsbury's – which this week announced its best Christmas ever – "has got the balance right in terms of quality and value."

Big price flop. The much-promoted Big Price Drop failed because Tesco's rivals bombarded shoppers with alternative vouchers and offers. 'Big Price Drop' will be remembered as more reflective of the shares than the campaign, according to Richard Hunter, head of equities at stockbrokers Hargreaves Lansdown.

Retail squeeze. Tesco is more dependent on non-food sales that its rivals – clothes, DVDs and even books. Poor sales figures from Argos, Mothercare, Halfords and Thorntons – all announced yesterday – show that it is in these non-essential areas that consumers are pulling back.

Ugly stores. Tesco, despite its success, is not Britain's best-loved retailer. London, in particular, has been flooded with cheaply fitted-out Tesco branches. A stores revamp has been promised.

Management. The profits warning is humiliating for the supermarket's new boss Philip Clarke, who only took over from the long-serving Sir Terry Leahy last year, and whose idea the Big Price Drop was. As the Evening Standard consumer business editor Jonathan Prynn commented, "The old Tesco simply did not do profit warnings, share price collapses and store closures."

What happens now?

The big worry for Tesco is its worldwide expansion plan, from America to Thailand and China. This has so far been fuelled by the profits from the 2,715 UK stores. Panmure analyst Philip Dorgan told The Guardian: "This is the nightmare scenario. If the UK's profits keep falling, then it will not be able to invest so much overseas."

In what The Guardian called "an unprecedented mea culpa", Philip Clarke admitted yesterday that Tesco had to change and promised to plough millions of pounds into improving the quality of its fresh food, the choice of products it sells as well as its customer service.

"This isn't going to kill us, it is going to make us stronger," he said. The Christmas collapse had led to a lot of "soul searching" among executives, he said. But he insisted the company responsible for taking £1 in every £7 spent on Britain's high streets was not in crisis. "I feel like I am in control and taking decisions that need to be taken." ·