Money-off coupons and a blitz on customer service failed to win back Tesco shoppers
Tesco has reported another quarter of falling sales in the UK after money-off coupons and a blitz on customer service failed to win back disgruntled shoppers.
Like-for-like sales, excluding petrol and VAT, declined 1.5% in the 13 weeks to 26 May, which analysts said was “disappointing”. It means Tesco’s domestic chain has now posted six quarters of falling sales on that basis. Analysts were also alarmed by sharply slowing sales at the US chain Fresh & Easy, which had growth of 3.6% compared with 12.3% in the previous quarter.
At its annual results in April, Tesco’s chief executive, Philip Clarke, announced a £1bn makeover of the UK chain designed to “put the heart and soul back into Tesco” after domestic profits fell for the first time in more than 20 years. With more than 2,700 stores, Tesco’s domestic chain pumps out two-thirds of the group’s profits and Clarke admitted it had taken “a little bit too much away from the shopper” during years of penny-pinching to boost the bottom line.
Clarke described the UK chain’s performance as steady and improving “relative to the market”.
The fall in first-quarter sales was only marginally better than the previous quarter, when sales, on the same basis, fell 1.6%. It was early days in the turnaround, Clarke added, as he said “very little of the £1bn had been spent. Customers were responding to the changes being made in store, which include more staff manning its produce and wines and spirits aisles. “Our customers are seeing the evidence of the changes we’re making and they’re telling us they like what they see,” said Clarke.
The retailer said it had hired 4,300 – including 500 in the last three weeks – of the 8,000 new staff it pledged to recruit in April with 100 stores refurbished since the start of the new year. Tesco’s stores have been described as “too industrial” and the makeovers involve a rustic look with green paint job, wooden fittings and the smell of bread baking.
Data from the research firm Kantar has shown the overall grocery market slowing as hard-up shoppers cut back their spending. “Consumer confidence is not getting any worse but it is not getting any better,” said Clarke, pointing to petrol prices that he said were putting an “amazing dent” in household budgets. “Real incomes are not growing so they are having to be very careful with their budgets.”
To win shoppers, the major supermarket chains tried to outflank each other with money-off coupons, with Clarke describing the sales climate as “very competitive”:. “There was an unhelpful step-up in the market of this type of promotion,” he said. “We played our part and planned to.”
The country’s jubilee celebrations provided some respite with the chain enjoying its biggest ever trading week outside Christmas, chalking up sales of more than £1bn, although the holiday fell in its second quarter.
Philip Dorgan, a Panmure Gordon analyst, said investors “don’t have to look very deeply into the numbers to see some disappointing sales growth (the UK, the US, the Bank), despite accelerating investment”. In 2008, Tesco bought out its financial services partner, Royal Bank of Scotland, but it has taken several years to transfer the accounts over to its own IT systems. All credit cards have now been moved over but the delay and a competitive car insurance market led to its sales falling 3.7%.
Analysts had feared a repeat of January’s shock profit warning as Tesco concentrated its efforts on the UK turnaround. But the retailer said: “At this early stage of the year we are performing in line with market expectations for the group. The outlook for the year as a whole remains unchanged.” Shares closed unchanged.
Andrew Kasoulis, a Credit Suisse analyst, said: “Importantly, Tesco has not warned [on profits]. Although it is still very early days in the recovery process, outlook is unchanged and we do not expect consensus to change.”
Clarke has already moved the break-even target for Fresh & Easy breaks even from the current financial year to next year. He said the sales at the US chain were “soft” in March but had improved. Fresh & Easy was a “challenger brand” that was having to broaden its appeal, he said, with major changes to its product range in the coming weeks. “It would have been nice to have double-digit like-for-like sales growth,” said Clarke, who added the US market remained “very exciting for us”.
“The Tesco recovery story has got off to a slow start,” said Nick Bubb, an independent retail analyst. He added that the under-pressure chief executive had been “hyperactive, with his sleeves rolled up sorting out the UK, as well as addressing problems elsewhere in the group”.