Under Scrutiny: Has Tesco made the right move?

David McCarthy and Andrew Porteous, of Evolution Securities, were speaking in response to Tesco announcing the Big Price Drop, a major shift in it price positioning strategy, which will see prices slashed on around 3,000 lines. These include many own-brands and basket staples, such as casserole steak, mince, bacon, ham and fresh chicken. The retailer said this was to provide immediate help for families in tough economic times and to give shoppers what they are asking for.

The latest figures from Kantar Worldpanel show Tesco’s market share to have tumbled, while the hard discounters continue to slowly increase their stake in the market.

The city analysts branded Tesco’s previous pricing policy as ineffective and out of sync with its customers’ wishes. However, they said that the £500m investment was the right move for the retailer and should help the company get onto the front foot. The retailer is leveraging £300m of the total investment from savings made by removing its double club card points — a marketing system not fully valued by consumers — giving it an advantage over its competitors, which do not have such obvious funding streams. 

The duo said: “Tesco is a dominant market leader with significant economies of scale and should be much cheaper than the competition. However, in recent years, it has increased its underlying UK operating margin and moved from being a sales-led retailer to being more margin-led. With Asda and Morrisons being sales-led, this was a strategic mistake by Tesco.”

They added: “Our only issue is whether £500m is enough. If not, then Tesco will have an issue in convincing customers it is cheaper. This kind of launch is really a one-off, and Tesco would lose credibility with consumers and investors if it has to relaunch with another £500m in six months.”

However, by being the first of the major retailers to set a major new pricing strategy, the analysts said Tesco should benefit from being the first retailer to set the new price levels, choose specific products to be cut and get a first run at suppliers, as well as being seen by the consumer to take the lead on prices. Asda has already hit back at the move, taking out advertising in the newspapers to highlight the 10% price guarantee policy it relaunched in January 2011. 

Porteous said: “Inevitably, with the biggest player in the market making a big effort on price and launching a big initiative, the competition will be affected by it and will need to do something.”
However, he did not think that the move spelled the end of BOGOFs. He said: “Obviously they have gone very high, much higher than they have been traditionally, but this is an effort to simplify the offer, and I don’t think the promotions will cease completely.”

He said: “Tesco would need some sustained recovery in the market share before you could say that it has been successful.”

The analysts said: “It is too early to say whether this move is the start of the end of the capital war. It will take some time before we know if this is leading to a permanent reduction in profitability for the industry.”

Another leading analyst commented that the other retailers simply did not have the capacity to react to Tesco’s latest initiative.

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