Competition is heating up among Britain's biggest supermarkets, as Morrisons and Amazon chose the day of Tesco's annual results to announce plans to expand their partnership.
It came as Tesco (TSCO) reported a slowdown in sales growth in the three months to June as it battled bad weather and increasingly cost-conscious customers.
Like-for-like sales, which strip out the effect of store openings and closures, were up just 0.2% to £13.9 billion. But commentators say Tesco is back to doing what it does best, putting its focus firmly back of cost-conscious consumers. Online food sales are up 7% in the period.
Morningstar analyst Ioannis Pontikis says the supermarket is now in the later stages of a long turnaround process, having gone through “one of the worst periods in its history”. Tesco is rated as a three-star stock by Morningstar analysts, which means that its current price is considered fairly valued.
Tesco chief executive Dave Lewis said poor weather had affected sales in central Europe, where sales are down nearly 5% year-on-year in the quarter. Sales in the UK and Republic of Ireland were one of the bright spots for the group, with a gain of 0.8% in the period.
Pontikis says Tesco has taken a dual approach to boosting sales, firstly by improving the store experience and also by keeping supplier costs down – he believes Tesco’s efforts to use its scale advantages into profitable growth are likely to be successful.
But despite its size and sale, Tesco does not possess an “economic moat” or sustainable competitive advantage, given the intense competition in the UK retail market, particularly with the impact of discounters such as Aldi and Lidl.
The FTSE 100 supermarket is held by a range of active and passive funds, and makes up 3.2% of the Bronze and five star-rated BlackRock UK Fund.
Cost Conscious Customers
Tesco’s market share is dropping, notes Fidelity Personal Investing’s Emma-Lou Montgomery, and the supermarket is focusing on what it does best, “ramping up savings for cost-conscious customers”.
Brewin Dolphin investment manager Arlene Ewing thinks Tesco’s turnaround plan is on track, pointing out that the firm is starting to fight back against the discount supermarkets. “This is another relatively positive set of numbers following a good start to the year,” she adds.
Morrisons (MRW) and Amazon (AMZN) chose the day of Tesco’s annual results to reveal they are expanding their partnership for same-day grocery deliveries to five more UK cities, having already launched the service in Leeds, Manchester, Birmingham and some parts of London.
Amazon also offers its own standalone grocery delivery services, Amazon Fresh and Amazon Pantry. Tesco is having to compete not only with new entrants such as Amazon but also more established online outlets like Ocado (OCDO), as well as the upstart discounters Aldi and Lidl.
Tesco's update comes amid a backdrop of subdued consumer spending and fears for the survival of the UK High Street’s biggest names. The rescue deal for Sir Philip Green’s Arcadia Group, which includes Topshop, Miss Selfridge and Dorothy Perkins, will lead to 23 store closures and 500 job losses.
Next week’s UK retail sales figures for May will be closely watched. April’s 0.2% month-on-month fall showed the extent of subdued consumer spending. Tesco mentioned the bad weather as a factor in its weaker sales in the last three months, and the official number is expected to reflect that.
For comparison, May 2018 saw a royal wedding and warmer weather that encouraged shoppers to buy more food and alcohol, Tesco’s chief executive said. June 2018 also saw the start of the football World Cup, which will make year-on-year comparisons tough for retailers in the coming months.
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