Is Tesco saved? A small victory for Dave Lewis in the supermarket's Christmas results, but 2016 remains a challenge

 
Philip Benton
Chief executive Dave Lewis can claim a Christmas miracle

Tesco reported its best Christmas trading results since Dave Lewis has been at the helm but does this really mean that ‘Drastic Dave’ and his management team can breathe a little easier?

The dynamics of grocery shopping has changed with value and convenience the two biggest factors for consumers. Competition has never been fiercer so it would be unrealistic for Tesco to expect to regain the near-dominant position it once enjoyed as the nation’s favourite supermarket.

If you can’t beat them, join them

However, what Tesco is doing well is playing the discounters at their own game, reflected in many of their core festive products being five per cent cheaper than last year in an effort to lure customers away from Aldi and Lidl.

Tesco also launched its ‘Brand Guarantee’ campaign in October which refunds shoppers at the till instantly if their branded shop would have been cheaper elsewhere. Like-for-like volumes were up 3.5 per cent which is the best measure of success as margins will ultimately be impacted by the wider food price deflation.

Aldi and Lidl will continue to eat up market share, impacting not only Tesco but its supermarket rivals too, due to their rapid UK expansion with Euromonitor International estimating that a further 136 discounter outlets will open in 2016. There will come a time where the discounters’ momentum will start to lag, with Aldi having already experienced a dip in profits, so the fact that Tesco is winning customers back to its stores is definitely an encouraging sign.

How do you solve a problem like Tesco Extra?

Despite posting surprising like-for-like sales growth in its hypermarket stores, the underutilised selling space remains a major issue for the retailer. Even with oil prices at a record low and Tesco petrol stations offering fuel for under £1, the retailer is still struggling to reverse a slide in customer footfall as consumer shopping habits has shifted to doing more frequent top-up shops where convenience is king.

This is a problem not unique to Tesco and the retailer will be watching with interest over Sainsbury’s proposed takeover of Home Retail Group. Sainsbury’s has already opened several Argos digital concessions within its larger stores and sold off its pharmacy business to Lloyds in an effort to profit from its excess space.

Tesco is also collaborating with non-food businesses to utilise surplus selling space as it announced a partnership with fashion group Arcadia in late 2015 where it will operate shop-in-shops within Tesco Extra stores. The retailer believes it will complement its own F&F clothing brand offerings, which reported like-for-like sales growth of five per cent, as it attempts to transform its hypermarkets into shopping destinations for fashion.

2016: The breakout year for online grocery shopping?

One of the most promising outcomes from Tesco’s festive trading results was their success in online home shopping with 22 December being reported as their busiest ever day. Encouragingly, they had 98 per cent availability with orders up 22 per cent and 1.4m units picked from their Customer Fulfilment Centre on the 23 December.

Tesco is the unrivalled leader in online grocery shopping and it now accounts for 10 per cent of its UK turnover, according to Euromonitor, compared to 6 per cent for its nearest rival Sainsbury’s. Although it has not yet been a particularly profitable venture, the amount of investment it has made in improving its supply chain mean it is well placed for a forthcoming battle with Amazon as the online giant prepares to officially make its play in the UK grocery market.

Dave Lewis recognises that the better than expected festive trading results is just a small victory, with 2016 set to be as challenging a year as ever for Tesco.

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