Tesco's first profit fall in 18 years: an unfortunate blip?

Oct 3, 2012

Investment programme aimed at winning back customers is blamed for supermarket's bad results

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TESCO announced today that profits for the six months to 25 August had fallen by 11 per cent to £1.66bn, the first time since 1994 that the supermarket giant has not reported growth.

Tesco had issued a profit warning to the City in January of this year, and while UK sales showed very modest growth of 0.1 per cent in the quarter, the impact of increased losses in Asia and lack of growth in the firm's American arm were factors in the profit reversal.

Analyst Kate Calvert of Seymour Pierce told Retail Week that the US losses were £8m worse than predicted at £74m compared to expectations. "The market was prepared for a decline in profits but this is a disappointing statement even in that context we believe."

But the big drag on Tesco's fortunes came from CEO Philip Clarke's investment plans, writes the BBC's Robert Peston: "Tesco is paying a big price to fix its UK business. The cost of hiring 8,000 additional staff to provide better service to customers is largely responsible for the fall in profits."

With serious profits growth not expected until 2014, Peston says that "the UK's biggest retailer is looking more mortal and vulnerable than in many years". His judgment was underlined by the financial results of rival Sainsbury's which today announced like-for-like sales growth in the UK of 1.9 per cent for the second quarter.

"There remains a long way to go before Tesco can be regarded as a company on the up again," says Alex Lawson of Retail Week. Its not that Clarke's strategy is wrong: "The retailer is improving store standards and many of the areas identified [for improvement] are the key issues the grocer needed to tackle, even if changes have simply brought its estate up to the standard of its rivals."

Lawson concludes that today’s results are the "first Bambi-like steps of Tesco’s attempts to win back the hearts of a nation that, to some extent, has become disenfranchised by its tired offer".

However, analyst Bryan Roberts of Kantar Retail struck a more positive note in The Guardian, saying: "In the fullness of time, Tesco’s recent problems are likely to be seen as an unfortunate blip. Although structural problems remain, such as Tesco’s reliance on tricky non-food categories in its Extra stores, its leadership in online and convenience store retailing augur well for the future."

Online innovations such as Click & Collect grocery suggest to Roberts that Tesco "is getting back on the front foot. Competitors should be fearing the worst as 2013 is likely to see a resurgent Tesco looking to make up the ground it has lost".

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