3 Reasons Which Make Tesco plc A Risky Stock Selection

Royston Wild looks at why Tesco plc (LON: TSCO) continues to worry investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

tesco

Today I am looking at why I believe Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) remains a risky investment for cautious investors.

The squeezed middle becoming more constrained

Tesco’s main mid-tier rival J Sainsbury has been able to negotiate the top-and-tailing of the UK grocery market by low-end outlets such as Aldi and premium retailers like Marks & Spencer. But while its Sainsbury saw sales increase 2.7% in the 12 weeks to February 2, according to Kantar Worldpanel, Tesco was not able to follow suit and saw sales fall 0.3% during the period.

Not only has Tesco failed to effectively develop the quality and image of its in-house brands — a point exacerbated by last year’s horsemeat scandal — but question marks have also risen over whether Tesco offers decent value for money compared with its competitors.

Continued erosion in activity at the tills has weighed on Tesco for many months, and the firm’s share of the British grocery market now stands at 29.2%, a marked fall from 30% at the same point last year. By comparison, Aldi saw its market share accelerate to 4.1% from 3.2% during the same period, while Waitrose’s share edged to 4.9% from 4.8%.

Total grocery spend also deteriorating

Not only is Tesco having to deal with operating in a rapidly-declining middle tier, but it is also having to contend with total spending growth at Britain’s grocers running at multi-year lows.

Although the UK economy is undoubtedly on the mend — the Bank of England upwardly revised its 2014 growth forecast to 3.4% from 2.8% in recent days — this is yet to be translated into a rapid expansion in consumer spending power.

Indeed, Kantar Worldpanel commented that 

grocery market growth slipped slightly to 2.4%, indicating that brighter economic prospects are yet to be seen in the nation’s shopping trolleys,”

and added

 “The slowest industry growth since 2005 made it hard for many of the biggest retailers to increase sales.” 

International operations remain weak

But Tesco’s sales woes are not just confined to the UK — excluding petrol, total international sales dropped 2.2% during the six weeks to January 4. In Asia sales fell 3.4%, with political instability in Thailand weighing heavily on performance in the region. And in Europe the impact of enduring macroeconomic pressure prompted revenues to dive 0.9%.

Even though Tesco drew a line under its catastrophic foray in the US by giving away its Fresh & Easy franchise last autumn, and also scaled back operations in China by combining its stores with those of China Resources Enterprise, the supermarket still has much head scratching to do before it can rectify its ailing fortunes in foreign climes.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Here’s how I’d aim to build a £50K SIPP into a £250K retirement fund

Our writer outlines the approach he would take to try and increase the value of his SIPP multiple times in…

Read more »

Investing Articles

9.4%+ yields! 3 proven FTSE 100 dividend payers I’d buy for my Stocks and Shares ISA

Our writer highlights a trio of FTSE 100 shares with yields close to 10%. He'd happily pop them into his…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »