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Can Tesco PLC Become The UK’s Target Corporation?

tesco2Tesco (LSE: TSCO) has been making headlines lately with the ousting of several executives as a result of discrepancies in its expected profits for 2014.  This is nothing new when it comes to ‘big box’ stores — even across the pond into the USA. 

Several well-known chain merchants in the US have been involved in some scandal or another — see, for example, Target’s (NYSE: TGT.US) data breach scandal that materialised last December. Despite that, comparable sales have mainly stayed relatively flat between 2013-2014 – and Target’s REDcard infiltration still continued to grow. Considering December was less than a year ago, not much has been mentioned about the breach as the new holiday season looms closer. In my opinion, Tesco will rise from the flames of scandal with small wounds, and hopefully a greater sense of integrity with the new management in session.

Tesco’s business model follows the same as America’s Target, utilising economies of scale to deliver basic products to consumers at lower prices, and  taking advantage of distribution warehouses and channels to transport goods to thousands of locations.  It also offers many of the mainstream brands that consumers recognise – we even share some brands like Colgate and Dove (Colgate-Palmolive and Unilever, respectively). Comparatively, Tesco touts a much larger store growth rate, having added 232 stores in the UK in 2014.

Unlike Tesco, Target does not boast the home-delivery service the same way Tesco has created.  In fact, home-delivery service is a new concept in American markets: Americans still depend highly on Amazon for shipment of necessities directly home.  Currently, only Giant Food hosts a similar national programme named ‘PeaPod’ that has not infiltrated the US market much, with e-commerce sales of groceries remaining stagnant.  But Whole Foods is even dabbling with the notion of home-delivery online grocery shopping with the unveiling of Whole Shopper.

Tesco, on the other hand, states that the home grocery delivery service has had more than ample growth in the last year – and is still projected to expand strongly in the market. In 2013 — its first year of launch — Tesco reported a 12.8% increase in online sales – knowingly attributed to the launch of the home-delivery service.  The number of customers using the service has grown to a whopping 200,000 customers (including our very own Mark Rogers!) by fiscal year-end 2014. Tesco is also starting to offer a “Click-to-Collect” offering as well – to have groceries gathered for store-pickup.  This concept, in comparison, is not new in the American markets, with Harris Teeter being the main company offering this feature. 

If Tesco continues to cater to the digital age and provide superb online platforms for consumers, the company can only expect major growth over the long term. And, according to the latest annual report, that’s exactly what it intends to do.

Tesco is interesting as a turnaround or deep value situation, but it's not an ideal fit for income investors right now. Meanwhile, an attractive small cap opportunity has caught my eye. The Motley Fool's lead smaller companies analyst has discovered a £250m hidden gem which could double profits within the next four years.

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Corrina Quader has no position in any shares mentioned. 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.