One Reason Why I Wouldn’t Buy Tesco PLC Today

Today I am looking at why Tesco (LSE: TSCO) is in line to experience fresh revenues weakness.

Premium push undermines sales outlook

The relentless march of the country’s budget grocers has dominated the headlines for more than a year now, putting the collective market share of the country’s big four supermarkets — Sainsbury’s, Asda, Morrisons and, of course, number one food house Tesco — under considerable pressure.

However, the popularity of these outlets amongst cost-conscious shoppers is not solely responsible for the heavy fragmentation of Tescothe British grocery sector. Indeed, high-end retailers including Waitrose and Marks & Spencer (LSE: MKS) have swam against the tide of surging demand for cheaper goods to great success through clever promotion of their premium offerings.

Waitrose noted in its latest quarterly update last month that sales had grown an impressive 6.5% in the 13 weeks to April 26. Meanwhile, ‘Marks and Sparks’ commented in May that sales in its Food division advanced an impressive 4.2% during 2013.

Interestingly Waitrose is making massive headway in the high-growth area of online retailing, and saw food sales via surge an eye-watering 79.4% during the three-month period. The company cited successful marketing and promotional activity‘ as important factors behind the result, putting the performance of Tesco’s internet division comfortably in the shade — the firm saw online sales grow by a far more modest 11% in the year concluding February 2014.

Britain’s largest supermarket chain should also be concerned by the aggressive expansion strategies of its premium rivals. Of the 1% of additional retail space Marks & Spencer plans to unveil this year, 2.5% of this is dedicated to its groceries arm, and the business plans to open new Simply Food outlets in Leeds and Braintree in the coming weeks.

premierfoodsWaitrose is also on the quest to add new floorspace, and built eight new outlets during quarter one versus nil in the same period in 2013. The company has also added new stores in Camden, Hereford and Leek in recent weeks, and is also building its portfolio of Little Waitrose convenience stores, the grocery sector’s other white-hot growth area.

Through smart product promotion and new line launches, Britain’s premium grocery houses have taken helped take the hatchet to the sector’s mid-tier retailers market share by attracting their more affluent customers. With Tesco and its peers still failing to effectively address this issue, I believe that the Cheshunt-based firm could be set to experience further woes at the checkout.

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