Tesco/UK Retail: Price promises protect market share

When Tesco last faced an economic meltdown in the global financial crisis of 2008, it focused on protecting profits. The strategy failed, allowing discount chains led by Aldi and Lidl to grab a slice of their market.

This time around, Tesco has a “relentless focus on value”, according to chief executive Ken Murphy. At Wednesday’s results, he vowed to protect customers by raising prices “a little less and a little later” than the competition.

Investors are not convinced. Tesco shares are looking cheap at forward price/earnings of just 10 times – a decade low – likely as German discounters continue to gain market share.

Still, Murphy’s claim might have some substance. With minimal overhead and razor-thin margins, Aldi and Lidl have less to absorb rising costs. It is questionable whether his thesis will prevail against larger competitors such as J. Sainsbury. In fact, Tesco’s retail operating profit margins have contracted over the past year, down 78 basis points yoy to 3.9 per cent meanwhile through August.

Although Aldi and Lidl have raised prices by more than Tesco, consumers still see the two as cheaper. With tight budgets, customers may prefer a grocer without a premium range that could tempt them to overspend.

This is revealed by the latest market share figures. According to Kantar, Aldi and Lidl together gained 2.2 percentage points in the 12 weeks to early September compared to the same period last year. Tesco fell half a percentage point in comparison, not bad but still a step in the wrong direction. Privately owned and with high debt to fund, Wm Morrison may have found it even more difficult to defend its market share.

Investors who have heavily devalued the sector this year support Murphy’s argument to some degree. Tesco shares have outperformed Sainsbury’s by 7 per cent year to date. But the metric that is perhaps more important to the market is Tesco’s market share. Should this fall further, investors will rightly continue to avoid the stock.

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https://www.ft.com/content/14ccbc1e-8a53-4db9-a1b2-93a2d02f10de Tesco/UK Retail: Price promises protect market share

Adam Bradshaw

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