S&P outlook switch gives Tesco cause for concern

Published on 01/08/2012 00:00

SUPERMARKET chain Tesco was yesterday placed on negative outlook by a key ratings agency due to lower profits and a weakening hold on the UK market.

The embattled grocer has endured one of the most challenging periods in its history after it issued its first profit warning in 20 years.

Standard & Poor’s said ongoing pressure from intensifying competition, weak consumer spending and lower profits could trigger a downgrade to its risk profile and credit rating.

The agency also warned that chief executive Philip Clarke’s £1 billion plan to invest in improving customer service in the group’s UK stores will negatively affect its trading margins.

A downgrade would make it more costly for the retailer to fund any expansion or turnaround plans and make it harder for the supermarket to keep prices low for customers.

A statement from S&P said: “Tesco’s operating performance will likely continue to be dampened by sluggish household spending in the UK as a result of nominal wage growth, a fragile labour and housing market, and high household debt burden.”

The stock has slumped 23 per cent since the profit warning at the start of the year, as its market share has been chipped away by rivals such as Aldi and Lidl.

Tesco admitted that its £500 million Big Price Drop launched last year failed to impress customers but has revamped the initiative to focus more on giving customers special offers and money-off coupons.

Clarke also unveiled plans to spend £200m on extra staff and improving levels of service after a trial in 200 stores delivered a 1.1 per cent sales boost.