Bottom Line: A shift at Tesco could change the whole market

Elizabeth Fournier
TESCO wasn’t the only supermarket moving downwards yesterday. As shares in the UK’s biggest grocer continued their downward trend, fellow retailers Sainsbury’s and Morrisons dipped in sympathy – despite the former recently topping profit forecasts and outshining its competitors.

So why all the discontent in the aisles? HSBC’s note on Tesco yesterday, in which it downgraded the retailer and warned it was on a “vicious spiral,” didn’t pull any punches. “Tesco needs to hurt its competitors,” it urged – fighting talk that clearly had investors sitting up and listening.

HSBC argues that Tesco is focusing too much on margins; attempting to maintain a level above five per cent that isn’t sustainable in the face of falling sales and shrinking market share.

Instead, it should abandon all pretence that cost cutting can solve the problem and instead turn on its rivals – aggressively slashing prices to either lure customers away from competitors or force them to follow suit, eating into profits. The advice makes sense.

Chief executive Philip Clarke is clearly set on the turnaround plan he promised two Christmases ago – focusing on its online business by investing in technology – but he needs to reassess the goalposts, which have shifted dramatically over the past year as budget retailers have gained share and squeezed the traditional players.

If he acts now and comes out fighting, Tesco has a chance to be one step ahead of its rivals – demolishing the competition and reasserting its place on the top of the pile.

Yesterday’s sector-wide slump proves investors believe the UK’s No.1 knows how to keep its crown. Tesco may be in the spotlight now, but no one will be safe if it decides to bare its claws.

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