Tesco's Loss of 'Street Cred'

28th Aug '14 by Gray Woods

25 comments 15458 reads

Under Leahy, Tesco (LON:TSCO) became a powerhouse (you can argue how, and at what expense all you like, but the fact remains, even now, it's market share of 28.8% is vastly ahead of its closest rival, Sainsbury's, whose is now 17.4%). The trouble is when something becomes the in effect king, unless it constantly changes its face, its attitude, unless it keeps itself nice and fresh, people get bored of it.

In a way it reminds me of clothing brands. French Connection (LON:FCCN) (aka FCUK) let themselves get over pumped. They were everywhere, but they didn't take advantage, got too much in peoples faces, and the masses got bored, so when something new and fresh came along, that's where they went.

A possibly more interesting analogy is the WWE. In the 90's and early 00's they were everywhere. The real cool kids, with a good number of stars, and new stars were always coming up to replace the old ones. You had Hulk Hogan, then Ultimate Warrior, then Brett Hart, then Shaun Michaels, then Steve Austin, then the Rock, then Brock Lesnar, then John Cena. That's where the list stops, and that is WWE's problem.

John Cena started off as hugely popular, but WWE were unable create any new rivals to match him, and thus replace him, so unlike his predecessor's, who remained the franchise player for only a few years, John Cena has been for the last eight. That's why the people started to turn on him, and stop watching, the masses became bored. They wanted something new, something fresh. Not the same old thing being pushed down their throats. John Cena is Tesco, and Tesco is John Cena. The masses are sick of the company, because it's not only everywhere, it's constantly being pushed in your face.

The trouble is, unlike the WWE, Tesco has got rivals. Take Waitrose, where people can talk about how they shopped there, "Yes, I've started shopping at Waitrose. Aren't I cool." Then there's the joyous moment when the shoppers leave Lidl or Aldi, 'Wow, it's so cheap, and the food isn't bad either. You really should check it out. P.S. Aren't I cool.' But what about Tesco you may ask. No one is going to talk about Tesco, other than to say that they are sick of them. Also, no one…

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intuitive6191

29th Aug '14

4- 0 to Aldi

Bonitabeach

The retail food market does not appear to be a "problem" for the management of Aldi/Lidl/Waitrose - where others see problems they see opportunity.

They just pay a visit to their local Tesco superstore or Tesco Express and come out smiling.

It wont be a problem for Aldi/Lidl because they can eat into Tesco's (and others) market share faster than the market itself declines.

Not sure about Waitrose as I dont have enough knowledge of the higher end of the market.

Regards

SevenPillars

Waitrose? You mean the company that's just issued it's second profit warning?

"Waitrose hit by supermarket price war sparked by Aldi and Lidl as upmarket store is forced to issue second profit warning in three years"

http://www.dailymail.co.uk/news/article-2713555/Waitrose-hit-supermarket-price-war-sparked-Aldi-Lidl-upmarket-store-forced-issue-second-profit-warning-three-years.html

Something else to consider about ALDI and Lidl. They are private companies that do not release profit/loss figures for the UK. They are in a growth phase that will probably go on for several more years. It wouldn't surprise me at all if they are loss making right now in the UK. Still, their advertising budget is probably quite low considering all the free publicity that they are getting as the supposed current best friend of the British consumer.

"Lidl is not legally obliged to publish details of how much money it makes in Britain because it is a privately owned company based in Germany, where it publishes consolidated accounts with a total profit figure but not with a country-by-country breakdown.

Lidl has been criticised privately by UK supermarkets for its lack of transparency and secrecy. They have also suspected that Lidl used its opacity to avoid paying similar levels of tax as they do."

http://www.bbc.co.uk/news/business-28416081

Neither ALDI nor Lidl have to worry about or respond to what the Stock Market thinks or pay dividends to investors.

One other stat. I read this morning that Tesco currently has around 45% of the online market in the UK. Astonish figure which it will be incredibly hard to maintain surely? ALDI and Lidl? A big fat zero. One assumes that eventually they will go online, but how much will that cost them and where is their infrastructure to do it? Consider what Morrisons had to go through by getting into bed with Ocado to get online, it's not cheap, but there again ALDI and Lidl don't tell us what profits or loss they make in the UK, and they don't have to care about what the market thinks.....

These discounters might simply be undercutting now in order to take market share. The fact that they don't have to tell us what their UK bottom line is, profit or loss, etc, makes it easy for them.

According to the article below, ALDI as a whole made £157million pre tax profit in 2012. I read today that Tesco will only make about £2.5billion next year. Panic.

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10343012/Aldi-posts-record-profits-as-the-alternative-to-the-Big-Four.html

Don't Panic! - Corporal Jones

Seven Pillars makes a lot of good points about Aldi’s business structure. I would guess that Aldi is currently profitable in the UK as it has historically spent very little on advertising (as Seven Pillars has stated) and that a lot of its stores are very well established.

This may change as Aldi have recently increased their store opening program and obviously increased their advertising budget. Having said that I would guess that their new stores would be profitable fairly quickly. They will take business from existing players and I would suspect that Tesco cant be happy with the prospect.

When discussing Aldi as a world brand it is important to note that there are in fact two Aldi’s - Aldi Nord and Aldi Sud. As you might imagine they had a common origin but are now considered separate businesses. I mention this as some newspapers seem to confuse the two companies.

cig

The telegraph numbers are for Aldi UK (presumably from Companies House disclosures), not Aldi worldwide (there's 2 of them to start with). They're just the wrong scale to be worldwide numbers. Revenue is useful but "profits" at the subsidiary level can be very notional.

It would surprise me if they were loss making in the UK, because it would be counter-cultural. Reinvesting profits in expansion, yes, loss making, no. Wouldn't expect online to come soon either, they'll probably let the posh retailers develop the logistics and once that it's a cheap commodity tech, maybe adopt it.

Gray Woods

I'm not sure their business models would suit online to be honest. They're food discounters, which means bringing in cheap food en mass and selling it swiftly. They would need longer lead times for online food sales, which could affect their fast turnover model, they also would need more food, and thus more storage, and I just cannot ever see it yielding them enough profit. Maybe a small scale online operation could be beneficial, but never the type that would threaten the Waitrose's and Tesco's etc. But for food, online just isn't ever going to be the big thing, it's always going to be footfall in stores. Take Tesco at current, they have over 40% of the online market, yet for 2013, online turnover was just £2.5bn. Something like 7% of Tesco's total UK turnover. And if you consider that the online food market is worth barely £6bn on the whole, then it becomes worth less than 5% of the UK market.

30th Aug '14

Firstly, many thanks for starting a thread on Food Retailing. The sector was a bit under represented on Stockopedia so well done for this thread and your later comments post results.

I think one of the reasons that Aldi in particular has managed to gain such traction in the market is that they were misunderstood and underestimated by the likes of Tesco. This could be because the industry often refers to them as "discounters" which tends to imply a suspect business model where they are selling an average product on super slim margins to gain market share.

It could be that Tesco thought this and assumed that Aldi would fold at some stage when the big four had one of their periodic price wars. Of course this didn’t happen and the big 4 are now destroying their own margins and Aldi are going from strength to strength.

Aldi are not really discounters as the industry tends to describe them - they have a long term sustainable business model where they sell good quality food at low prices. They are in fact an excellent food retailer with low costs - which is something quite different. Aldi have won many awards for the quality of their food and their trophy cabinet must be full to bursting. It is very impressive.

Very soon (if not already) Aldi will overtake Waitrose in market share and become a sizable headache for the big four. It will be very interesting to see how they respond.

johnrosier

Back in January when i bailed out of my failed Sainsbury trade for a small loss i reckoned that the sector was looking like a classic value trap. I think there is more pain to come.

At Tesco, I would not pin my hopes on the new Chief Executive arriving in September. Sainsbury drifted for years throughout the 1990's and 2000's in what was a pretty good operating environment. Justin King managed a revival of sorts but it takes time. Given the current operating background I fear that there could be a lot more pain to come as it is a difficult job turning around a retail business, and even more so customer perception, at the best of times.

No doubt there will be arguments put forward about asset values but I think that will be the next area to come under pressure. How much is a huge store really worth if you can't get the returns and I'm not sure the UK needs many more ice rinks or bowling alleys.

My guess is 150p, (the 1998,1999,2000 and 2003 support level) within the next six months or so. let's see!

No problem, I'm just happy there was a debate to be found here.

Regards Aldi's rise. I'm not really sure you could ever put your finger on what brought it about. After all, they've been around for a long time, and never posed any trouble before. I suppose the best answer is the big four screwed up, with Tesco under Clarke, and Morrisons under Philips the biggest offenders. It's interesting that Asda are not really facing as many headwinds, also, Sainsbury are holding on, albeit at a cost. It's Tesco and Morrisons that are the ones truly suffering, which points the finger at them.

As I say, I don't think the reasons for how Aldi rose to fore really matter now. It's what can mainly Tesco and Morrisons do about it. For Morrisons, I truly fear for them, as the deal with Ocado to me is a sign of sheet desperation. The good terms earned by Ocado can be taken no other way. For Tesco, I think they have the strength to sort themselves out. But as I eluded in the thread description, they need to remember their place, i.e. their main market, which is the middle range products (I focussed more on this subject in my follow up The Case For/Against Tesco/).

In terms of Aldi overtaking Waitrose, I think it's a dead cert, and I believe in the long run, they could overtake Morrisons. Lidl on the other hand, I'm not so sure. Their image troubles are what would make me question their longevity. Whereas Aldi is seen as Primark, or even an Ikea, Lidl, again all I think of is Netto. In the shakeup that the next few years are guaranteed to bring, it will be interesting to see if Lidl can shake their image troubles.

You make an interesting point about the value of Tesco's property portfolio, and it's something I often mention. Yes, it may be worth 180p, but they are not ever going to liquidate it, so the bottom line profit and dividend are what matters. However, it does to end extent provide an absolute minimum in my view. Plain and simple, if Tesco ever dropped to the 180p level, they would be prime for a takeover, which would immediately see them bounce back up.

That makes 180p the worst case scenario. If they touched 150p, I'd probably put everything I had in them, because no way would someone not look at taking them out. The absolute bottom price for me will be 210p, but that's just a feeling, and come the interims, that feeling could change. If the interims hold no more shocks, which I would suspect they should not, as it wouldn't make for a good start for Lewis if they did. The smart move would be to get all the shocks out of the way, which I would hope the trading statement has done, as that gives Lewis some breathing space, also the chance to in the long run, beat targets.

But again, you can't really judge until you hear what it is he is actually going to do. However, they remind me in a way of Aviva a few years back, also, Vodafone. Aviva was 290p, and everyone was saying their demise was clear. The rivals were better, the international business had crumbled, Greece. I said they were a solid business, had a well known name, were an industry powerhouse and leader, and their CEO was skilled at recovery. They are now 520p. Vodafone were at 130p, and all I heard was they had no room left to grow, had too many rivals, costs of 4g anyone, they were a dead share. Nothing but a dividend payer. I said Verizon supported their share price, and gave room for growth. I doubled my money on them as well. BT I was told at 140p were a dead share. More likely to fold under their pension deficit than recover. Too many rivals I was told, a dinosaur. I said if you thought BT would go under, you were mad. They were a national asset, and their infrastructure property was second to none. They also had a new CEO, who I reckoned had a plan. I more than doubled my money on them.

This isn't about me highlighting my investment returns, just a lesson I learnt about big companies that are out of favour, and facing mighty headwinds. Though sometimes they off the wayward, it is rare that they do not recover in the long run. This philosophy was actually founded from Buffet. I always remember his story about American Express, and it's done me well. When a massive company that is near enough a national asset falls out of favour, as long as it is still profitable, has a good balance sheet, and its fundamental appeal still holds strong, the odds are, they are going to recover strongly. Tesco is still profitable, their balance sheet is not as good as it was, but is still strong enough, and the core majority are not going to stop shopping there.

3-5 years is the minimum timescale I see for Tesco to turn themselves around. I would hope a share price of 350p come 2018, with a 4% dividend yield. For a company Tesco's size, well worth the investment.

1st Sep '14

Right now I find this whole sector uninvestable. Market sentiment is against it and I don't think the debate is as clear cut as some so called experts see it. For example, at the moment "discounters" like Aldi and Lidl are the clear winners, but they don't do what the market wants the like of Morrisons, Tesco, Sainsbury to do more of, small convenience stores and online. They don't do online at all! But even the discounters aren't true discounters in the same way that KwikSave was back in the 80's. I see Aldi and Lidl as a more middle England, middle class aspirational shopper discounter. KwikSave was pile high, sell cheap and a godsend if you were an impoverished student like me back then. Your average snob type M&S, Sainsbury customer wouldn't have bee seen dead in a Kwiksave.

The possibility of a Tesco takeover if it got to 150-180p I see as a total non starter. Why? Firstly because as soon as there was a whiff of a buyer for it the share price would shoot up. Who could afford to raise the cash for it? A Chinese wealth fund to take it private? £24billion (ish) of property, and even in difficult times still forecast making £2.5billion profit and then there is Tesco's online. They have about 45% of the online market, it was mentioned here online turnover is £2.5 billion. Ocado's revenue is around £800million. What in heaven's name is Tesco online worth given Ocado's inflated valuation? What would Tesco Online be worth as a standalone company?

There's also been talk of Morrison going private. They have £9-10billion of freehold property, current share price values the company at £4billion. Apparently, they've just had their best month's trading for a long time suggesting their new strategy may be turning things around. I reckon Tesco will have been watching Morrison carefully before deciding on whether to unleash the next price war. If Morrison are turning around Tesco are bound to follow.

Finally, Tesco slashed the dividend, which must put both Morrison and Sainsbury under pressure to do the same. There's no way I can see these two maintaining the divi in the face of Tesco's 75% reduction, although Morrison have suggested in the past that their divi is safe for now. It's clear that Tesco must be planning something. The one that may have most to lose is Sainsbury, consistently one of the most expensive food retailers. They've just opened a massive dinosaur store near where I live, car park is 75% empty most of the time I pass by while down the road ASDA is usually packed.

One more anecdotal story. The local Lidl near me has lost quite a bit of custom recently. Why? Because a new ASDA opened just down the road from it. I'd love to see Lidl's accounts for that shop, because it's nowhere near as busy as it was before (at least when I visit, occasional Saturdays).

I'd been searching for this information as I'm sure I had read somewhere that Tesco made a profit online.

"Tesco has piled the pressure on its rivals to state whether they make any money from their online operations after the UK's biggest supermarket said its groceries home delivery business made a massive £127m profit last year."

http://www.independent.co.uk/news/business/news/tesco-who-says-its-hard-to-make-home-delivery-profits-9153185.html

Doesn't seem to make any difference to the city perception of the company, but when you consider that Ocado, so hyped yet can't make a profit, has a current market cap of £2billion and forecast P/E of 166, how much would Tesco's online business be worth as a standalone business? How much does the city think it's worth as part of boring old bricks and mortar Tesco?

Thanks for highlighting that, I'd read that earlier in the year, but couldn't for the life of me find the article. Your point about the value of Tesco online is a good one, how much is it worth. £2.5bn turnover, £127m profit. Give it a P/E ratio of 15 and you'd get £2bn, which is the same value as Ocado. But then, if it's the same value of Ocado, is in the same industry, is the leader in that industry, and on top of that, is profitable, using Ocado's value, you'd think it should be worth four, maybe five times that as a stand alone. The trouble is, I don't really rate it that way, I just rate Ocado as being massively overvalued, like most tech companies are. For some insane reason, I've never been able to fathom, the word online allows a company a vast premium.

So assuming Tesco online was awarded this premium, would it be worth it. My feeling is no, I think £4-5bn is around fair value, £7-8bn for a takeover, and my reasoning for this is simple. The majority of the masses will shop in stores for as long as they are physically able. So for me, the growth will come from people living further out needing home delivery, the overworked who sometimes can't be bothered to head to a store, the elderly and disabled getting more tech savvy, and the current tech savvy generation becoming elderly. So there is growth, there is potential, but not the type Ocado's value implies. For me, the future is firmly Tesco's ground operations, with the online providing a nice side operation.

2nd Sep '14

Interesting note in the finance roundup section of the Daily Mail, which mentions Tesco as a potential takeover target. 'Senior City brokers have said that the recent fall - 40% - has put it within gobbling distance of hungry buyers.'

They mention WalMart as potential buyers, but I would very much doubt that would happen. No way would it get past the competition regulator. 46% of the market. No chance. If you ask me, there is a lot of value to be found in Tesco at this price, and if a takeover did happen, it's more likely by a group you would not expect. A wealth fund of sorts, Arab, Chinese, or a group of hedge funds, I heard someone say what about Buffet and Berkshire, but they have recently made a big purchase, so I doubt that.

Being honest, I don't see a takeover happening full stop at this price. However, if they fell below 200p, my view on that would change, and I wouldn't be surprised to see maybe a Carrefour looking at a reverse takeover of sorts. Create a group that could properly compete with Walmart on size and power. I don't see them falling that low, and firmly believe Lewis will turn things around, and the share price will recover to around the 350-400p mark in a few years time. But that's just it, time will tell.

It's funny how the City talks about potential takeovers when they have depressed the price down so much, yet if a serious bidder came in the talk would then be of the bid needing to be closer to the real or potential value of the company. Regardless of City talk there is no way Tesco would sell to a bidder at its current depressed price let alone talk of 150-180p as the bottom. Any bid would be seen as hostile with a recommendation to turn it down as it wouldn't reflect the true potential value of the company and assets. Same with Morrison, current market cap £4billion, freehold property around £10billion. It's not as if these companies are on the brink of going under and therefore a bidder could pick up cheap assets in a final distress sale. A serious bidder would need to come in at a premium over the current price and even then I doubt they would get far, unless they offered 375p a share for Tesco and around 270p for Morrisons as a starting point. Even the Chinese and Middle East wealth funds would struggle to raise that sort of money.

jetstar

Wow! how things have changed. Talk over a takeover would have been laughed at 18 months ago. Like Alex Ferguson at MU, Terry Leahy knew when to leave. As to possible suitors I find hard to believe someone would want to, certainly not Walmart as they own Asda (monopolies etc)

Regards a takeover, as I say, I agree, I see little chance. But it's funny you mention 375p. Two years ago if a takeover was pitched for Tesco, you'd have been talking 650p minimum, so with a shift like that, never say never. But I just can't see it happening. A takeover/merger with Carrefour would be interesting, mainly because Carrefour have conquered the hypermarket which Tesco are continuing to fail to do. Carrefour expertise on the non-food and how to integrate it with the food would massively boost Tesco's hypermarket and non-food, which could swiftly turnaround profit growth. However, again, without some massive shifts in the sector, I just cannot see it happening. But it makes for interesting times, and will certainly be something Lewis will have to be aware of, because if the markets don't like his plans, the vultures will swoop in.

Regards Leahy knowing when to leave, I'm not so sure Tesco would be in such a position with him still at the helm. I think a large part of Tesco's demise has been its loss of its portrayed ruthless streak. During Leahy's tenure, if a rival came sniffing, he shut them down hard and fast, so they couldn't become a true rival. After all, remember, Aldi have been around since 1989, Lidl, 1994, and companies that tried to step up in the past like Kwik Save, Netto, even Safeway, have all fallen.

It's funny, when Clarke was appointed, I said he I was sceptical, mainly, because he seemed like a guy. I said I feared he lacked the needed ruthless streak to keep Tesco on its perch, and I fear his rivals would see him as easy prey. I said the same about Man United's appointment of David Moyes. I said the players would see him as below standard, I said Man United's rivals would think him, and, thus, Man United now weak, even prime for the taking. I said Sir Alex Fergusons main strength was that not only did his rivals fear him, but so did his players. His enemy's dared not to threaten him, and whenever they played Man United with him at the helm, gave him the utmost respect, whilst his players were petrified of playing badly for him, and loved him such, they would give him their absolute all at all time. So Ferguson equalled the respect and fear of rivals, no matter what team he puts out there, and players that love and respect him such, they are desperate to play their absolute best for him. Above and beyond.

People under Leahy knew he expected the best, and if they did not bring it, like Ferguson, they'd be replaced, also, Leahy's rivals knew that if they threatened to get too close, Leahy would act to ruthlessly shut them down. When he left, Clarke not only failed to see the rivals coming, and failed to do what was needed anywhere near fast enough to shut them down, in doing so, he allowed his rivals to see him as weak, and thus prime for the taking. Hopefully, Lewis won't make the same mistakes, and will asset himself swiftly, and ruthlessly if needed.

Tesco's Loss of 'Street Cred'

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Gray Woods

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