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Tesco's mess-ups: let me count the ways Tesco's mess-ups: let me count the ways
(35 minutes later)
Here comes another innovation from Philip Clarke, under-fire Tesco chief executive: a "food-to-go store" to give the likes of Pret a Manger a run for their money. It sounds interesting; it may even be a modest winner in time. But it is also another distraction from investors' chief worries: how does Clarke intend to halt the march of the discounters in the UK, and do Tesco's troubles stem from the price of its groceries and confusing promotions?Here comes another innovation from Philip Clarke, under-fire Tesco chief executive: a "food-to-go store" to give the likes of Pret a Manger a run for their money. It sounds interesting; it may even be a modest winner in time. But it is also another distraction from investors' chief worries: how does Clarke intend to halt the march of the discounters in the UK, and do Tesco's troubles stem from the price of its groceries and confusing promotions?
Tesco and the City live in parallel universes at present: they talk about different subjects. Clarke likes to champion Tesco's "family of brands", which includes Giraffe restaurants, Hudl tablets and Blinkbox online entertainment, all of which he regards as vital to "winning in the new era of retail".Tesco and the City live in parallel universes at present: they talk about different subjects. Clarke likes to champion Tesco's "family of brands", which includes Giraffe restaurants, Hudl tablets and Blinkbox online entertainment, all of which he regards as vital to "winning in the new era of retail".
The City camp regards such excitements as irrelevant. It worries that Tesco has forgotten the threat from old era retailers such as Aldi and Lidl and lost its marketing prowess. Two pieces of analysts' research this week make alarming reading for shareholders.The City camp regards such excitements as irrelevant. It worries that Tesco has forgotten the threat from old era retailers such as Aldi and Lidl and lost its marketing prowess. Two pieces of analysts' research this week make alarming reading for shareholders.
First, Espirito Santo showed that Tesco customers need to carry a calculator to know the best prices for fruit and vegetables. Want brown onions? Buy them individually: the price was 78p per kilogram when Espirito looked, much better than £2.07 in multi-pack form. Green peppers, on the other hand, are a multi-pack must: the price was £1.98 per kilogram versus £4.80. Brussels sprouts? Don't touch the multi-packs at £7 per kilogram; get them loose at £2.25.First, Espirito Santo showed that Tesco customers need to carry a calculator to know the best prices for fruit and vegetables. Want brown onions? Buy them individually: the price was 78p per kilogram when Espirito looked, much better than £2.07 in multi-pack form. Green peppers, on the other hand, are a multi-pack must: the price was £1.98 per kilogram versus £4.80. Brussels sprouts? Don't touch the multi-packs at £7 per kilogram; get them loose at £2.25.
So it went on. Espirito examined 17 items and found the loose product was cheaper in 10 instances. "The inconsistency is baffling," concludes Espirito analyst Rickin Thakrar, noting also that Tesco's shelf-edge pricing is 40% more expensive than Aldi's on some key fresh produce lines. It is one reason, he argues, why Tesco consistently scores poorly for value for money on the bank's proprietary 2,000-shopper survey. Another is Tesco's apparent multi-buy obsession, which is out of tune with current "waste less" habits. Customers notice details.So it went on. Espirito examined 17 items and found the loose product was cheaper in 10 instances. "The inconsistency is baffling," concludes Espirito analyst Rickin Thakrar, noting also that Tesco's shelf-edge pricing is 40% more expensive than Aldi's on some key fresh produce lines. It is one reason, he argues, why Tesco consistently scores poorly for value for money on the bank's proprietary 2,000-shopper survey. Another is Tesco's apparent multi-buy obsession, which is out of tune with current "waste less" habits. Customers notice details.
The second note was from HSBC. On current trends, it calculated, the combined market share of Aldi and Lidl in the UK (currently 7.5%) will be greater than Morrisons' within two years. The Germans wouldn't stop there: they plan to double their number of UK stores.The second note was from HSBC. On current trends, it calculated, the combined market share of Aldi and Lidl in the UK (currently 7.5%) will be greater than Morrisons' within two years. The Germans wouldn't stop there: they plan to double their number of UK stores.
How have Aldi and Lidl done it? In part, because Tesco took its foot off their throats. Back the 1990s, the last time investors fretted about the discount threat, Tesco launched its Value range and cut prices on own-label products. Discounters' market share was actually lower in 2000 than in 1990, thanks in part to the demise of Kwik Save. "Aggressive pricing across the offer was the key tool," says HSBC's David McCarthy.How have Aldi and Lidl done it? In part, because Tesco took its foot off their throats. Back the 1990s, the last time investors fretted about the discount threat, Tesco launched its Value range and cut prices on own-label products. Discounters' market share was actually lower in 2000 than in 1990, thanks in part to the demise of Kwik Save. "Aggressive pricing across the offer was the key tool," says HSBC's David McCarthy.
More of the same is now required, he's been arguing for ages. "Discounters will evolve and improve over time. It is best to take the pain of dealing with them now, as it will only get more expensive if left," he says.More of the same is now required, he's been arguing for ages. "Discounters will evolve and improve over time. It is best to take the pain of dealing with them now, as it will only get more expensive if left," he says.
Do not expect Clarke to follow that advice. Next week Tesco will announce annual profits of £3.2bn, down 10%, and Clarke will inevitably argue that progress is being made beneath the surface and that Tesco is following "sharper" pricing anyway. Do not expect Clarke to follow that advice. Next week, Tesco will announce annual profits of £3.2bn, down 10%, and Clarke will inevitably argue that progress is being made beneath the surface and that Tesco is following "sharper" pricing anyway.
But look at Tesco's market share: it is 28.6% when a fall below 30% seemed unimaginable a few years ago. And look at the share price: it stands at a nine-year low, despite a 5% dividend yield. That looks increasingly like a loss of confidence in Clarke's "build a better Tesco" policy.But look at Tesco's market share: it is 28.6% when a fall below 30% seemed unimaginable a few years ago. And look at the share price: it stands at a nine-year low, despite a 5% dividend yield. That looks increasingly like a loss of confidence in Clarke's "build a better Tesco" policy.
Sympathy extends this far. Tesco's engine developed its splutter when the old regime milked the UK business to launch Fresh & Easy in the US, a fact conveniently overlooked by grumbling former directors. The now-abandoned US adventure, pitched as a low-risk experiment, ended up costing £1.6bn. If Clarke had that sum at his disposal today, he could hit the discounters hard and protect shareholders' dividends.Sympathy extends this far. Tesco's engine developed its splutter when the old regime milked the UK business to launch Fresh & Easy in the US, a fact conveniently overlooked by grumbling former directors. The now-abandoned US adventure, pitched as a low-risk experiment, ended up costing £1.6bn. If Clarke had that sum at his disposal today, he could hit the discounters hard and protect shareholders' dividends.
But Fresh & Easy is history. Clarke has had three years in the job and has made his strategic bet. If investors really want a different strategy, it could only happen credibly under a new chief executive. That is not going to happen soon because there is no obvious candidate and Tesco chairman Sir Richard Broadbent, who is already looking for a new finance director, doesn't seem the type to wield the axe. In any case, Broadbent is signed up to Clarke's plan.But Fresh & Easy is history. Clarke has had three years in the job and has made his strategic bet. If investors really want a different strategy, it could only happen credibly under a new chief executive. That is not going to happen soon because there is no obvious candidate and Tesco chairman Sir Richard Broadbent, who is already looking for a new finance director, doesn't seem the type to wield the axe. In any case, Broadbent is signed up to Clarke's plan.
But, with Tesco at sub-300p, this now smells like serious trouble ahead.But, with Tesco at sub-300p, this now smells like serious trouble ahead.
Mike Ashley breaks agreement for second timeMike Ashley breaks agreement for second time
Lock-up agreements should mean what they say, it was argued here this week after Mike Ashley sold a 4% stake in Sports Direct 166 days after he said he wouldn't sell any shares for 180 days. It was the second time he has done it. Last year he sold six months into a one-year lock-up. Lock-up agreements should mean what they say, it was argued here this week after Mike Ashley sold a 4% stake in Sports Direct 166 days after he said he wouldn't sell any shares for 180 days. It was the second time he has done it. Last year, he sold six months into a one-year lock-up.
Ashley's sales were legitimate because a lock-up, despite conjuring images of handcuffs, is no such thing. It turns out it can be ignored if the company's broker gives the say-so. The rules, then, are a nonsense.Ashley's sales were legitimate because a lock-up, despite conjuring images of handcuffs, is no such thing. It turns out it can be ignored if the company's broker gives the say-so. The rules, then, are a nonsense.
The Association of British Insurers (ABI) agrees. Robert Hingley, director of investment affairs, says early sales, especially very early sales, are "unwelcome and damaging to market integrity". Quite right: lock-ups are meant to regulate the supply of shares and investors are supposed to be able to rely on the information.The Association of British Insurers (ABI) agrees. Robert Hingley, director of investment affairs, says early sales, especially very early sales, are "unwelcome and damaging to market integrity". Quite right: lock-ups are meant to regulate the supply of shares and investors are supposed to be able to rely on the information.
The ABI suggests long lock-ups should specify a "hard" period in which sales are banned altogether; then there could be a short "soft" period close to expiry in which, as now, the bank can give consent. It sounds fiddly, but it must be better than the current ridiculous system.The ABI suggests long lock-ups should specify a "hard" period in which sales are banned altogether; then there could be a short "soft" period close to expiry in which, as now, the bank can give consent. It sounds fiddly, but it must be better than the current ridiculous system.
The investment banks, of course, will fight it all the way. They love exclusive little arrangements with clients to place shares as no competition usually means fatter fees.The investment banks, of course, will fight it all the way. They love exclusive little arrangements with clients to place shares as no competition usually means fatter fees.
As it happens, Goldman Sachs probably lost money on this week's Ashley trade, but that's another story. The Financial Conduct Authority should still tell the investment bankers to fall into line with the ABI's idea. Clarity is good for markets.As it happens, Goldman Sachs probably lost money on this week's Ashley trade, but that's another story. The Financial Conduct Authority should still tell the investment bankers to fall into line with the ABI's idea. Clarity is good for markets.
Bleeding the exchequerBleeding the exchequer
What a shame, though, that business secretary Vince Cable didn't know lock-ups can be ignored; or, if he did, that he didn't take advantage. The government said it wouldn't sell its remaining 30% in Royal Mail before 13 April, as mentioned here last week. Monday, then, is the first possible day. But – you've guessed it – the share price has just fallen 10% in a week.What a shame, though, that business secretary Vince Cable didn't know lock-ups can be ignored; or, if he did, that he didn't take advantage. The government said it wouldn't sell its remaining 30% in Royal Mail before 13 April, as mentioned here last week. Monday, then, is the first possible day. But – you've guessed it – the share price has just fallen 10% in a week.