TESCO’S first fall in profits for almost two decades suggests a watershed moment for the supermarkets. On one side, the race for space against a backdrop of generous margins; on the other, an altogether tougher battle for bargain-conscious, internet-savvy and convenience-oriented customers as margins shrink.
Yesterday’s results were a worrying suggestion that Tesco is losing that battle. Philip Clarke may have a plan to turn things around, but he inherited an unenviable situation from Sir Terry Leahy, and it doesn’t look like progress will be quick. These interim results showed statutory profit before tax down 11.6 per cent, even on slightly rising sales, up 1.4 per cent. The fall was partly due to the cost of hiring 8,000 new staff and 230 store refreshments. But the disappointing numbers weren’t restricted to the UK, with another turnaround plan in train to try and stanch losses in the US during the second half of the year. The very title of the interim statement, “Investing In A Better Tesco”, sounds more like a politician’s manifesto pledge to increase public spending than the reassuring ring of corporate profit.
Sainsbury at first glance seems to be a different story, with Justin King royally pleased with total sales up 4.3 per cent in the second quarter – although if you look at the like-for-like numbers for the half year, 1.7 per cent doesn’t seem quite so rosy. In truth, Sainsbury may be in a better immediate position, but a unique summer’s trade boosted by a one-off Paralymic sponsorship is no answer to long-term challenges like looming food price inflation.
Sainsbury noted its strong online growth of 20 per cent year-on-year and the 49 convenience stores it opened in the first half – both may be on trend but they are also less profitable to operate (perhaps why Sainsbury’s online service will introduce a £25 minimum spend on 24 October).
In a sign that the two giants aren’t so different, yesterday also saw Sainsbury criticised by the Advertising Standards Association for misleading elements in its Brand Match promotion, the same one King described in his statement by saying: “Our customers tell us that they believe it to be the simplest price guarantee in the market.” This is similar to the trouble Tesco went through over its Big Price Drop campaign in 2011, and indicates that both big retailers are having trouble devising genuinely straightforward price guarantees that also help their own bottom lines.
Perhaps the retail behemoths need to look to the fast-evolving Aldi for some fresh ideas. It may only have four per cent of the UK market, but the discount chain saw sales rise 29.4 per cent in 2011 and it plans to expand by opening 40 new stores by the end of 2013. Limited choice and lean staffing combined with a truly uncomplicated promise of value that even the middle classes are now finding hard to resist – it all suggests a store more in touch with the future than the big players.