Can Tesco Do a Supermarket Sweep, and What Might That Mean For Consumers?

By Patrick Foot, financial markets writer at IG.

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Tesco, the UK supermarket titan, is under a huge amount of scrutiny at the moment.

The company ends the summer without its long-standing CEO, Phil Clarke, after he resigned under pressure from the board as the company warned that it was on course to miss profit targets.

Sales and market share have both been declining in recent years, and Phil Clarke’s attempts to reverse the trend and maintain Tesco’s sustained dominance of the supermarket sector have not been successful. Now, new CEO Dave Lewis will take over a company with a downgraded credit rating from S&P, another sign of faltering confidence in the brand and its management.

All of this has meant that Tesco stock has been on a severe downward trend for the past year, losing over 30% of its value from August 2013.

How has the company hit such hard times? The answer provided by most analysts is the tightening of consumer spending brought about by the recession and its stalled recovery, which has led consumers away from big brand supermarkets and towards cheaper alternatives like Lidl and Aldi.

Examining Tesco’s major competitors supports this theory. Morrisons are in an even worse run on the markets, dropping 40% in 12 months, whilst Sainsbury’s are down around 20%. Over in the US, Wal-Mart (owner of Asda) is also struggling to entice investors and has seen its profit guidance cut amidst faltering growth.

None of these brands have yet seen a turnaround, despite clear signs of health beginning to return to the UK economy. The fear is that consumers who have grown used to saving money on groceries – either via a discount store or lowered spending overall – will now prove reluctant to return to an unpopular supermarket, whose reputation remains mired by the horsemeat scandal.

One thing is clear, though: none of these companies will go down quietly, and will instead fight each other tooth and nail to return to the primacy of UK grocery retailing. And if consumer behaviour really has changed for good, then there may no longer be room for four major supermarket brands to coexist.

The solution for Dave Lewis to turn around Tesco’s fortunes put forward by most is for the brand to undercut all its rivals in terms of price. The company has already done much to convince consumers that its prices aren’t at a premium, but its healthy margin, dividend and value compared to competitors gives it an undeniable advantage should a full-on price war kick off.

That may not do much for Tesco investors – most analysts expect the company to cut its dividend, and the impact on its margins will be considerable in the short term at least – but could prove a boon to consumer as  fierce competition leads to drops in grocery pricing across the board. This will only intensify if Asda enters the fray (as they must, or risk disappearing altogether), as the second biggest supermarket chain in the country and with a company behind it that dwarfs even Tesco.

There will be other changes, of course. Tesco’s massive hyper-stores have been identified as a problem, and the company may need to innovate in order to impress an increasingly tech-savvy audience.

After such a long period of status quo, major supermarket brands have struggled for too long. Whether they still possess the attributes needed to pull through will be tested in the coming months, and consumers may well be the ones that benefit.

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