Are Your Investments Safe From Tesco-Style Failure?

TescoThe bigger they are, the harder they fall. That’s a cliché being neatly illustrated by Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) just now, as shareholder confidence drops even faster than Goliath hit the ground.

Its first-quarter results show a 3.8% fall in like-for-like sales, and there are claims in the press that it is currently haemorrhaging one million customers a week.

The press may be exaggerating, but it’s still worth questioning why one of the most popular UK retailer and the world’s third-largest supermarket group has seen such a fall from grace.

So why has it? Some analysts point out that it didn’t listen to customers, it didn’t adapt, it didn’t learn from the competition… Heck, it even planted ‘anti-homeless spikes’ outside the doors of one shop, garnering massive public outrage (for the record, it says they were to deter anti-social behaviour).

Here are the lessons that British business must learn from Tesco’s fall from grace…

Never forget the core customers

Tesco has seen incredible success at home; at one point it was widely claimed that £1 in every £7 spent in Britain was spent in Tesco (closer examination of the figures suggest that was closer to £1 in every £8, but that’s still a vast market share).

But its relentless drive to expand into America, China, India and Europe led to claims it had forgotten its home market, and in some cases was simply throwing good money after bad.

As the overseas business failed to take off as the supermarket had hoped, it had to retrench, pulling out of the USA at a cost of £1.2 billion. Meanwhile, back in the UK there were claims that the group was failing to adapt to changing shopping patterns and consumer preferences.

If you don’t adapt, the competitors will

Many analysts believe that customers are forsaking Tesco because it offers neither the cheapest bargains nor the best-quality produce, meaning customers at both ends of the spectrum are looking for alternative supermarkets that better meet their needs.

Other supermarkets have been relentlessly pursuing these disaffected customers. Sainsbury’s and Waitrose advertise high-quality, highly ethical produce while discount supermarkets Aldi and Lidl highlight their bargains, and entice even affluent shoppers with cut-price lobster and award-winning produce.

Protect your reputation

No matter how big the business, a bad news story can be immensely damaging. Whether customers’ priorities were quality or price, both were put off by the horsemeat scandal – a scandal to which the retailer initially seemed light-hearted about (tweeting that it was ‘off to hit the hay’).

Take some (corporate) responsibility

Thanks to Twitter, Facebook and other social media, a negative story can spread like wildfire and there’s so much supermarket choice that a boycott is surprisingly easy to carry out.

So no wonder Tesco winced when stories of the ‘anti-homeless’ spikes outside one of its stores hit the internet. Thousands of people protested online, accusing the supermarket giant of treating the homeless like pigeons. The studs have since been removed.

Respond fast to failure

Every company experiences occasional hiccups and extraordinary growth may not be sustainable in the long term. Shareholders and customers accept that. However, when a blue chip does falter, it needs to show that it has learnt lessons and adapted its strategy.

Yet some analysts have criticised Tesco’s action plan, which includes cutting prices, training more staff and revamping stores. Clive Black of Shore Capital commented: “The business, once a shoppers’ champion is… in a cycle of what seems to be structural decline involving a sustained period of downgrades to earnings.”

There’s a risk that such statements can be can be self-fulfilling, making a fast, authoritative recovery plan essential following poor results.

What now for Tesco shares?

If you own Tesco shares, what’s the right move? Do you buy more and hope for a strong recovery, or do you cut your losses and drop the shares like they’re a horsemeat lasagne?

Our top analysts have studied Tesco and the whole supermarket sector, and reached an investment verdict. In fact, Tesco's fall from grace could reward smart investors who take action NOW.

Read our special FREE report, 'The Death of Tesco?', for vital information on the right action for your portfolio.

Felicity owns no shares in Tesco or any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.