I used to be a fan of Tesco (LSE: TSCO), seeing its increasing diversity as very desirable. But I failed to see the looming collapse of its core groceries business in the wake of the Aldi and Lidl assault.
Right through the dark days and the company’s struggle to rebuild, I’ve been watching with a feeling that one day I might want to buy Tesco shares when the future is looking bright again.
But that’s a bad premise to start from, and one based on emotional attachment rather than rational analysis. The old Tesco is gone, and the new one needs to be evaluated from scratch with no harking back to the good old days.
Looking at a 17% share price rise so far in 2017, we might think that things are finally starting to pick up. And Tesco has just reported a 2.6% rise in like-for-like sales over the Christmas period in the UK and Republic of Ireland.
That might sound good until we hear, as my Motley Fool colleague Royston Wild has pointed out, that any pants Tesco might have had left have been well and truly beaten off by Lidl and Aldi — which saw sales grow by 8% and 10%, respectively.
Then we have the confirmation of Tesco’s latest round of cost-cutting as it aims to save £1.5bn. Now, cost-cutting in itself can be a very good thing, and reductions in some layers of management and behind-the-scenes staff might be seen as an unfortunate though essential sacrifice.
But Tesco’s latest cuts go further than that, with plans to slash fresh food counter sales. Meat, fish and deli counters are set to be closed at 90 of the company’s stores, while many others will see reduced services.
Tesco says around half of the expected 9,000 affected workers could be redeployed, so there are still thousands more jobs set to go on top of the 10,000 lost since Dave Line took over at CEO in 2014. And as if to highlight the depths of the desperation, the firm also says it’s axing hot food services at its canteens.
Tesco’s recent record of apparently sustainable quarterly sales growth, while sounding positive on the face of it, really doesn’t seem that impressive when it’s starting from depressed levels and when it’s being greatly outstripped by the competition.
And while further reductions in costs are themselves welcome, the fact that they include reducing services is less welcome. What Tesco is doing is shaving down its differentiating offer and settling on the lowest common denominator — just selling stuff at the cheapest possible price.
No going back
I think that’s an inevitability now that the retail landscape has permanently changed. When the first Aldi opened near me about six years ago (directly opposite a Tesco), it was always quiet. Now it’s always packed while Tesco is a good bit less busy. And there’s another new Aldi opened even closer to me.
The bottom line for investors, as I suggested when I looked at Wm Morrison and J Sainsbury, is that we really don’t have to think about when Tesco shares will once again be good value. There are plenty more attractive investments out there, in far more profitable sectors.
Don’t miss our special stock presentation.
It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.
They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.
That’s why they’re referring to it as the FTSE’s ‘double agent’.
Because they believe it’s working both with the market… And against it.
To find out why we think you should add it to your portfolio today…
Alan Oscroft 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.