Tesco credit rating downgrade possibility: Has its house brands strategy gone too far?

Posted by AFN Staff Writers on 2nd August 2012

Leading UK grocery retailer Tesco is facing some tough decisions after ratings agency Standard & Poor changed its outlook from “stable” to “negative” due to concerns about “weakening” profits at the supermarket giant.  Standard & Poor said it was also re-considering the supermarkets current credit rating.

In a statement the ratings agency said “that in light of currently difficult industry conditions, a trend of weakening profitability and low top-line growth will continue.”

“In our opinion, market conditions will continue to be extremely competitive, particularly in the UK, with high pricing pressure throughout the industry,” the statement added.

The blow comes after Tesco posted its first profit warning in 20 years in January 2012, which sent shockwaves throughout the supermarket industry.

Much of Tesco’s success over the past decade has been attributed to the aggressive marketing of its own house brand labels. However in June 2012 it was reported that former Tesco CEO, Sir Terry Leahy, warned others that there was a limit to how much private label goods can dominate their shelves.

The most recent news out of Tesco may be a sign that sacrificing high-profile brands to make shelf-space  for house-brands could actually be a high-risk strategy.