Why Tesco PLC Could Split Itself In Three

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.

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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.