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The Risks Of Investing In Tesco PLC

Today I am highlighting what you need to know before investing in Tesco (LSE: TSCO).

Discounters on the charge

The fragmentation of the British grocery space has, of course, become a huge bugbear for the country’s established chains such as Tesco. While huge brand investment and a focus on quality has paid dividends for premium outlets such as Waitrose and Marks & Spencer, it is Tescothe effect of the budget sub-sector thathas really hammered Tesco’s market share in recent times.

These problems have led to company chief executive Philip Clarke announcing his departure earlier today, the decision coming as a result of another humiliating profits warning for the first half of the fiscal year. Unilever’s Dave Lewis — who heads up the firm’s Personal Care arm — will step into the breach, although any new initiatives will take some time to bed in.

And figures released last month from research house IGD suggest that the success of discounters such as Aldi and Lidl is here to last. Indeed, the combined market value of these outlets is forecast to hit £21.4bn by 2019, almost double the current figure of £10.8bn.

Mid-tier rival J Sainsbury took the bull by the horns last month when it announced plans to re-establish the Netto budget chain in the UK from this year, and Tesco may be forced into similar action to keep stop the low-end retailers nibbling at its heels. The firm’s market share slumped to 28.9% from 30.3% in the three months to 22 June, latest Kantar Worldpanel figures showed.

Revenues under the cosh

Tesco is investing heavily in online and convenience channels in order to keep revenues moving in the right direction, spheres not yet exploited by the discount sector. Still, these areas are becoming increasingly congested by all of the industry’s big players, so the firm may have to start pulling rabbits out of hats to get back to its former glory.

In the meantime, the sector’s largest operators are locked in a ferocious battle to undercut each other price-wise. Indeed, Tesco commented in June’s interims that these structural changes in the grocery industry caused its like-for-like sales — excluding fuel — to drop 3.7% during March-May.

And IGD does not expect this trend of heavy price slashing to change any time soon — indeed, the grocery market is anticipated to grow to 16.3% to £203bn through to 2019, a significant deceleration from growth of 19.5% in the five years to 2014. The researcher notes that 

“[T]he quest for value remains the top concern for shoppers [and] having learned how to make their money stretch further during tough times, by shopping around or making lists to minimise food waste, ‘savvy shopping’ looks certain to continue.”

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Royston Wild has no position in any shares mentioned. The Motley Fool owns shares of Tesco.