Tesco reported annual growth in volumes for the first time in five years this morning. Shares are down 3% as shareholders anticipate even more hard work just to maintain the current position.
Like-f0r-like sales growth improved in the final quarter hitting 1.6% across the Group and 0.9% in the UK. This brought Group FY like-for-like to even and 0.7% fall in the UK. Volumes rose 3,3% in the UK in the final quarter. Over the full year, volumes rose for the first time in five years. Operating profit was flat YoY at £944m. Including the sale of the Korean business, debt fell £6.2bn.
Tesco has finally found an effective strategy. Competitive prices on branded goods to take share from the big chains. New private label brands and range reductions in certain categories to compete with the discounters, where possible. Falling costs have offered management the room to cut prices without hurting the bottom line.
As always though, the market looks forward. The improved performance, management say, is unlikely to translate into bottom line growth in 2016. Management expect to miss consensus operating profit of £1.25bn due to continued price deflation.
In other words, Tesco’s management has done everything possible but can’t change the competitive environment. Indeed, Tesco’s fantastic final quarter would seem to presage an intensification of future competition, not a reduction.
Asda is now haemorrhaging share at a rate approaching the losses Tesco sustained in 2014. Morrisons had a good 2015 but has shown a sharp acceleration in losses since Tesco started to turn around.
The fundamental dynamic driving the market is Aldi/Lidl gaining 1.5% share/year. Given the economics of their business, there is no sign that this rate of growth will slow before 2020. Who is going to pay for this loss? Today’s results suggest that it won’t be Tesco.
If it isn’t Tesco then it must be Asda or Morrisons. The two latter chains combined have slightly less market share than Tesco standing alone. If they have to eat all the market share loss between them, it will surely mean that one of them goes out of business by the end of the decade.
Given this dynamic, it is surprising that Morrisons shares are relatively flat. Morrisons has far more to lose from Tesco turning around than Tesco has to gain.
Sorry I meant the Aldi queues were not long as they are so quick at the checkout, its like catching them as they come off the checkout. Not sure why people still go to Tescos given the choice. OK Aldis have a limited amount of shops. I used to shop in Sainsburys before Aldi but they got too expensive. Now I'm waiting for the new Aldi to open.
