Tesco Will Accelerate Price War in Wake of Falling Profits

17 Apr 2014 --- UK supermarket giant Tesco announced its second year in a row of falling profits yesterday, with UK like-for-like sales down 1.3% and group profits of £3.3bn, down 6% in the year ending 22 February. In an attempt to turnaround its fortunes the retailer announced plans to accelerate the price war against its rivals and boost add-on concepts such as its Giraffe restaurants.

The retailer said it still faced challenges transforming its general merchandise business as more people sought out deals online and sales were under pressure in the UK, eastern Europe and Asia. The company promised price roll-backs on even more products, following its £200m investment in pricing earlier this year, which saw the price of many key products lowered.

“We are transforming Tesco through a relentless focus on providing the most compelling offer for our customers,” said chief executive Philip Clarke. “Our results reflect the challenges we face in a trading environment which is changing more rapidly than ever before. We are determined to lead the industry in this period of change.

“Having strengthened the foundations of our business in the UK, we are now accelerating our growth in new channels and investing in sharper prices, improved quality, stronger ranges and better service. Since setting out these plans just seven weeks ago, we have already made a substantial investment in price, launched Clubcard Fuel Save and re-launched our general merchandise ranges across the business,” he said. “We are going faster with our work to transform our Extra stores to create more compelling destinations and will complete more than 50 in the first half alone.”

“During the year, we have maintained our focus on cash and capital discipline,” he explained. “We have significantly reduced our new investment in Europe, focusing the majority of our overseas capital on targeted, high-returning investments in Korea, Malaysia and Thailand. We have completed our exit from the US and established partnerships with CRE in China and Tata in India, which provide continued access to two of the world’s most exciting markets, consistent with a sustainable level of future investment.”

Total UK sales decline in 2013 by 0.1% to just over £48bn. UK trading profit declined by 3.6% to £2,191m. The company said it continued to move away from low margin products such as consumer electronics and it would be migrating to more profitable categories. Its new Spring/ Summer general merchandise ranges will be anchored around Home, Cook & Dine, Stationery and Party ranges.

The grocery market saw further weakness in the period after Christmas and in February industry food inflation reached its lowest rate since July 2012. These factors contributed to a decline in Tesco’s sales performance in the fourth quarter.

Tesco is also reported to be planning to reduce the size of five of its larger stores by around 20,000 sq ft, but it is also likely to be looking at more tie-ups with other companies such as the discount department store the original Factory Shop. It may also add more of the children’s soft play centre concept, Funky Monkeys, which already exists in Newport and Stockton.

In addition, Tesco plans to open more than 100 restaurant and coffee shops under the brand names Giraffe, Decks and Harris+Hoole in an attempt to turnaround its stores.

The retailer also plans to open a further 150 Express stores this year and refresh another 450. It opened 128 stores last year and refreshed 200.