Tesco is poised to fight back against rivals Aldi and Lidl as it accelerates its turnaround plan with fresh price cuts, more convenience outlets, large store revamps and investment in online.
Britain’s biggest retailer is some 22 months into a turnaround programme that has already seen more than £1 billion ploughed into store refurbishments, additional staff and new product ranges. Yet sales at UK stores open for more than a year, excluding fuel and VAT, slid 2.4 per cent in the six weeks to 4 January and, according to recent industry data, have continued to fall since.
The group, in common with the UK’s three other big grocers – Asda, Sainsbury’s and Morrisons – is being squeezed between the hard discounters Aldi and Lidl and upmarket operators Waitrose and Marks & Spencer, shedding market share in the process.
In a strategy update to City analysts yesterday, Tesco also said it planned a further “significant” reduction in net new space, resulting in a reduction in overall capital expenditure.
Its commitment to “sharper prices” – with £200 million put into lowering prices on everyday products – will be seen as a response to the rise of the discounters, which have seen their share of Britain’s £170bn food and grocery market leap in recent years. However, the latest figure is less than that committed during previous campaigns.
Chief executive Philip Clarke said: “Prices must get better. They must be more stable. Frivolous promotions must end.”
Tesco, which generates about two-thirds of its revenue from its home market, has also suffered more than many rivals because it has traditionally sold a higher proportion of large-ticket non-food items, such as televisions and kitchen appliances, where shoppers cut back most in an economic downturn.
To address that, Clarke has been refocusing the company’s non-food offer on higher-margin categories such as clothing and homewares, but progress has been slow, with only about 100 of its 900 larger stores refurbished so far.
The Tesco boss is also investing heavily in digital services, local convenience stores and click-and-collect points.
Group capital expenditure will be reduced to no more than £2.5bn a year for at least the next three financial years, Tesco said yesterday, having previously indicated a figure of £3.2bn for 2013-14.
European chains Carrefour and Metro, facing many of the same challenges as their British peer, have also reduced capital expenditure in recent years. Both have begun to increase investment again to revamp stores, though they are still spending less than Tesco as a percentage of sales.
In the UK, in 2012-13, Tesco opened 1.4 million square feet of net new space, down 40 per cent on the year before, and said it planned to open a similar amount in 2013-14, including a large proportion focused on convenience stores.
On Monday, the group said it was in talks with several companies over a possible restructuring of its struggling business in Turkey.
The plans come as closest rival Asda is also launching a fight-back after seeing sales flatline, pledging to spend £200m of its own on price cuts and £750m in store revamps and openings this year.