I’ve been pretty bearish on Tesco (LSE: TSCO) for more than a little while now. I’m concerned about the company’s ability to thrive in an era when the German discounters have changed the game, grabbing the customers that all of the FTSE 100 supermarkets had long taken for granted.
Never one to be accused of sitting still though, Tesco has taken what it has hoped to be hugely-transformative steps. First came the £4bn purchase of wholesaler Booker Group earlier this year, a deal which has already proved pretty lucrative to the chain, as revealed by quarterly trading numbers released last week.
Of the £685m worth of revenues that the group’s UK and Irish divisions generated in the six months to August, it was announced that Booker contributed a whopping £97m. What’s more, the mega-merger delivered £16m worth of synergies in the first half and is on course to deliver “at least” £60m worth for the full fiscal year.
The next rabbit Tesco is hoping to pull from the hat is a direct attack on the dominance of Aldi and Lidl. Last month saw the much-awaited launch of its cut-price Jack’s outlets, named after company founder Jack Cohen, whose philosophy to “stack ‘em high, sell ‘em low” Tesco is hoping will see it battle back against the discounters
But, as Sainsbury’s found when it attempted to muscle in on the budget segment with its Netto joint venture — a foray which was consigned to the dustbin in 2016 after just a couple of disappointing years — taking on the Central Europeans is much more difficult in practice.
As chief executive of Aldi UK and Ireland Giles Hurley told The Guardian last week: “We will respond as required to maintain price leadership,” adding that “it’s not just about price, it’s about quality of our offering.”
Hurley paid testament to the 25 years that his chain has spent perfecting its business model, a model which he said “will be a real struggle for any more complex supermarket to successfully imitate… let alone replicate it.”
The pressure’s rising
And latest figures from the business underlined what a stranglehold that it, like its rival Lidl, has on the market today. Accelerating sales in the British Isles saw total takings top £10bn for the first time in 2017, its market share growing more than any other supermarket with 1.1m more shoppers having barged through its doors versus the prior year.
And Aldi plans to continue expanding its network of 775 stores to keep grabbing custom from the established ‘Big Four’ operators. It has a target of more than 1,000 stores by 2022, and is establishing the necessary support framework to service these shops with the creation of new distribution centres, and the extension of existing facilities.
Tesco’s share price slumped last week, thanks to its disappointing first-half profits performance, and it’s now dealing at its cheapest since April. And I’d be happy to sell out too given its rapidly-diminishing allure with British shoppers and subsequently-worrisome profits outlook.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.