Why Tesco PLC Could Split Itself In Three

Tesco PLC (LON: TSCO) could split itself in three to fight the discounters.

| 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 (LSE: TSCO) (NASDAQOTH: TSCDY.US) is in crisis mode as the company struggles to compete with lower cost rivals such as Aldi and Lidl, otherwise known as “the discounters”. 

Unfortunately, the discounter war has already claimed the head of Tesco’s (now former) CEO, Philip Clarke, whose previous turnaround attempt failed to gain traction and win over customers. Philip Clarke’s replacement, Dave Lewis, is due to start in October.

Dave Lewis is stepping into the breach with no experience running a company like Tesco. There’s no doubt that Lewis has got a tough job ahead of him. The Unilever executive is yet to draw up a plan to help Tesco take on the discounters. 

A radical plantesco2

However, one City analyst has recently suggested that Tesco’s new boss takes the radical step of splitting the business up, in order to compete with the discounters. 

This simple but yet groundbreaking idea, is centred on Tesco’s multiple product lines. All of the company’s product lines have different customers with different needs, which Tesco is struggling to meet all in one go. For example, Tesco has three main product lines — Finest, Everyday Value and ordinary brands — each of which has a different customer base. 

In theory, splitting up the brands would allow Tesco to place its ‘Finest’ stores in more affluent areas. Stores specialising in Everyday Value products would be priced to compete with the discounters. The higher-end version would be able to compete with peers such as Waitrose or Marks & Spencer, both of which are also stealing market share from Tesco. 

Additionally, as well as stocking different product lines within different stores, Tesco would be able to streamline customer service in each store. Specifically, Finest stores would place a premium of good customer service, while Everyday Value stores would neglect customer service for lower prices. 

No going back

At first glance, this idea seems to make sense, although it would be a costly move for Tesco. What’s more, if the supermarket giant did go ahead and rip itself apart, there would be no going back.

If the plan failed to work, the supermarket giant would be in an even worse position than it is now. Further, the supermarket giant would lose many of the competitive advantages that it currently has, such as size.

Still, whatever course Tesco decides to take, investors may have to wait several years to see results from the struggling retailer. For long-term investors, however, a few years of waiting is a small price to pay. Moreover, two years of lacklustre share price performance gives investors to reinvest their dividends at an attractive price, which should turbocharge returns when Tesco springs back into life.

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.

Rupert Hargreaves owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »