Tesco announces record profit but approach to recession questioned

Posted by Daniel Palmer on 22nd April 2009

Tesco, the UK’s leading supermarket operator and world’s third largest retailer, reported their highest ever profit overnight but has been criticised by an analyst for a “short-term approach” to counter the economic crisis in the UK.

Mostly lauded for a 10% lift in underlying profit given the tough economic conditions, there were some critics willing to suggest the company may have erred in attempting to take on the discount grocers, whose share – while growing – remained far from a threat.

Last year, to counter the rapid growth – albeit off a small base – of discounters Lidl and Aldi, Tesco introduced a new ‘discounter’ range of private label goods. The range, priced below their other private label products, followed a survey by Tesco discovering that price was more important to consumers now than at any time in the past two decades.

Steve Gates, Managing Partner of The Gap Partnership retail consultancy, questioned the current strategy, arguing that their sales compared unfavourably to their main competitors. “Today’s results raise questions about the approach adopted by Tesco to ride the waves of the economic storm,” he said, according to Talking Retail. “It has adopted a short-term strategy in the UK to cut prices for its customers, squeezing its suppliers to invest in price and deliver cheaper ranges.”

“In stark contrast, Asda and Morrisons have adopted a longer-term strategy to deliver discounted lines for consumers,” he noted. “Whilst price is an important negotiating point, it is not the only one. To deliver consumer value and increase market share, Asda and Morrisons have collaborated with their suppliers to unearth new areas of savings using other variables such as terms of business, cash, risk and investment.”

The company, however, remains adamant that their renewed focus on price will serve them well, convinced price will prove the primary purchase driver over the next couple of years.

“At a time when customers everywhere are feeling the economic strain, we are responding to their changing needs in all our markets by lowering prices, introducing more affordable products and offering even sharper promotions,” Tesco Chief Executive, Terry Leahy, advised. “These actions, combined with our core strengths – in selling food and everyday essentials, owning our own property and having a broad business base – are helping us to cope well with the effects of the downturn. We are also pleased with the early performance of Tesco Personal Finance under our ownership.”

“We have made a good start to the new financial year and I am confident Tesco will continue to make good progress even in the current global economic environment.”

The company pointed to a more streamlined operation for their resilient profit result, including changes such as:

* Savings in the supply chain – more shelf-ready packaging, reconfiguring of the depot network, increased vehicle utilisation and more productive work methods in depots.
* Significantly higher capital investment in energy-saving projects across the business – in new refrigeration, store lobbies, and lighting – delivering significant reductions in consumption and reducing utility costs. Energy consumption fell by 8% last year despite business growth, the company said.
* The introduction of new checkout technology for stores has continued to reduce costs and improve customer service, the company claimed. Around 25% of their UK customer transactions are through self-service checkouts.

Finance to drive future growth?

Their finance division, which has expanded over the past year, showed potential with an operating profit of £244m (A$506m). Given that they have effectively shown up some of the UK’s biggest banks, many of which are operating at a loss, it is no surprise they are planning to become a “full-service retail bank” and introduce bank branches at 30 of their stores.

The irony of course being that Tesco shoppers are borrowing from Tesco to buy from Tesco. No wonder they’re making money.