Trouble ahead for Tesco as JP Morgan downgrades supermarket

Tesco have been downgraded to underweight by J.P. Morgan. The supermarket is expected to underpeform due to structural changes in the UK food industry which may have a particularly damaging effect on Tesco. According to JP Morgan's Jaime Vazquez:

In our view, pricing architecture is an industry problem, but is of most concern to Tesco because its prices and ranges are margin driven.

Discount retail stores such as Aldi are changing the "price/range architecture" of the sector. Value ranges in Tesco products have become largely redundant as rivals Aldi and Lidl are not only keeping their discount price but improved the quality of their products.

J.P. Morgan concludes that Tesco should look to examples from abroad to deal with the challenges of the changing market.

We think the price of the mid-tier, own label should be reduced. The solution entails reducing the gross margin, thus reversing the trends seen in recent years. This is the strategy followed by Leclerc in France and Mercadona in Spain, a strategy that has effectively stalled the growth of the discounters in their respective markets.

Shares in the company are down just under three per cent in early trading.

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