Tesco PLC Hasn’t Bottomed Yet…

Trends, whether you’re talking about skinny jeans or shares, tend to last much longer than you expected.

Basically when a share price — viewed over months and years — is rising, the market is taking the view that the company will steadily grow its profits over the long-term. Likewise, if the share price is falling, the market is taking the view that the company’s profitability is tumbling.

So when you invest for the long term, you need to take a view about whether the company is growing or is in decline.

A storm of change

Tesco  (LSE: TSCO)’s domination of the UK grocery market peaked in 2007, as did its share price. Since then, there has been a downward trend, with the share price now halved from its highs.

tesco2After the Second World War Britain’s corner shops and department stores were caught up in a storm of change, with the rise of the motor car and the lorry, growing household wealth and the advent of ‘pile it high and sell it cheap’. This led to the emergence of the supermarkets.

Today the supermarkets are no longer the upstarts but the incumbents. And they themselves are facing a storm of technological and social change. With barriers to entry crashing down across this industry, we have seen an astonishing growth in competition.

In the past, it was the biggest companies that usually won; after all, they had the economies of scale and buying power. In the tech-driven, information-rich world of the future, it will be the most agile and the most creative.

Tesco needs a clear brand, and a clear message

In the midst of all this change, we seem to have forgotten what Tesco’s brand is all about. The new Chief Executive, Dave Lewis, as an alumnus of Unilever, will know better than most how crucial branding is.

If he can put together a clear marketing message which defines Tesco, if he can sell Tesco to the consumer like Terry Leahy once did, he may yet turn this ship around.

But this will take a lot of time, and a lot of work. That’s why I think Tesco hasn’t bottomed yet. The dreadful latest results show that this is a knife which is still falling.

With recovery/turnaround plays such as this, it pays to be patient, keep the share on your watch list, and bide your time. This company still has so many strengths that I find it difficult to believe that it won’t eventually be turned around.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco and Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.