We are in the middle of a period in which many of the supermarket chains provide their latest financial results. In this era of negative inflation and enhanced competition, none looks particularly good. However, much depends on expectations. Many City commentators still seem wedded to the idea that with the right management and the right strategy we will all return to the heady days of consistent growth and steady profit margins.
Halfway through their financial year, the recently published accounts from Tesco for the six months to the end of August reflect the problems they are facing. Like-for-like sales in the UK were down by 1%, accompanied by a massive reduction in profitability. Operating margins are now under 0.8%, a far cry from the 5% figure Tesco regularly reported just a few short years ago.
A significant part of their explanation for their dire profit figures lies in their stated priority to regain competitiveness in the core UK business. This involves amongst other changes more customer facing staff, reduced prices and improved on shelf stock availability. It is difficult to see this tinkering-around-the -edges making the Tesco super tanker change course very quickly.
Ken Parsons, Chief Executive of the RSA, commented, “The big supermarkets are in a long term battle against the onward march of the discounters. In some European markets the discounters’ market share is much higher than in the UK, although the difficulty in finding suitable sites will ultimately limit their share in the UK. However, the pressures they are exerting are not going to ease over the next few years.
“Smaller convenience stores, particularly in rural areas, are in a good position to provide friendly and efficient service and to offer the different, often local, products that make shopping less of a chore. However, it is inevitable that they will get caught in the crossfire as the big boys fight their war of attrition. Smaller shops provide far more than groceries. They are real social hubs for the communities they serve. This unpaid role will only get more important as the population continues to become more elderly. It is therefore vital that bodies such as the Competition and Markets Authority and the Grocery Code Adjudicator ensure that the battle is fought fairly and that smaller shops are not penalised unfairly. Pressures on individuals in big companies to meet targets can so easily lead to formal policies being “bent” – as the awful warning from Volkswagen shows. There is also the “waterbed effect” – a supplier faced with pressure from a powerful big customer to push their prices down can then maintain their overall profitability by a compensating upwards push on prices charged to their smaller customers who have less bargaining power. It is vital that competition remains fair in this disrupted marketplace.”
The outlook for the big supermarket chains depends on how quickly they respond to the new realities and that needs far more than a few price cuts and a couple more checkouts open. The supermarkets are in a similar situation to the traditional national airlines two decades ago when EasyJet and Ryanair came onto the scene. Suddenly the industry was totally disrupted. Some airlines were unable to adapt and disappeared (Swissair), some adapted sufficiently quickly and have survived (British Airways), whilst the jury is still out in the case of others such as Air France. Can Tesco and the others adapt their business model sufficiently quickly to meet the challenge posed by Lidl and Aldi, with their disruptive and very different business model? Being a bit cheaper than before, with a bit better customer service, probably isn’t going to be enough.
But as always, it is the customer who will decide.
Post will be moved to the press release archive on Sunday October 9th, 2016