Stephen Jardine: Tesco comeback is not yet in the bag

The store has made a great turnaround but is not out of the woods yet, writes Stephen Jardine

Tesco has reported a proft rise of 28 per cent. Picture: Kathryn Wylie

It’s been a good week for British supermarkets. That is a sentence I thought I’d never write again.

Not so long ago the market leaders were in crisis. But this week the Co-op moved out of the red and Tesco reported profits up 28 per cent. As the rest of retail struggles, supermarkets are the one bright spot on the High Street.

The revival has been striking, especially in the case of Britain’s biggest retailer. A few years ago, this column was dominated by Tesco’s woes. From selling horsemeat to unsuspecting customers and accountancy scandals to mistreating staff and suppliers; the bad news just piled up.

In just 12 months that switch turned a £2 billion profit into a £6bn loss for Tesco. Survival depended on new boss Dave Lewis and a turnaround strategy that pulled no punches.

The company also trimmed its over-ambitious expansion and closed down international ventures to concentrate on getting the basics right at home. This week that strategy started to pay off as profits soared back to £1.3bn.

The revival has been based around cost-cutting but also the launch of Tesco’s farm brands.

So after all the negative news, has Tesco managed to rekindle its romance with British shoppers? A lot of that will come down to what happens next. Central to the new Tesco strategy is the acquisition of wholesaler Booker. That promised massive savings and efficiencies for Tesco; integration is now well under way but shoppers have still to see benefits.

While the worst times may be over for Britain’s big supermarkets, the best times are definitely in the past. While they were expanding into selling pet insurance and setting up coffee shops, overseas discounters like Lidl and Aldi stole their pitch selling to customers at keen prices.

Together they now account for £1 in every £8 spent in supermarkets in this country and that is territory that can never be regained. Or can it?

The growth of Aldi and Lidl has been the big shock for Britain’s supermarkets. They didn’t see it coming and still have no idea how far it can go. Doing nothing doesn’t seem like a smart option so could Tesco use booming finances and the Booker deal as the basis for a swoop into discounter territory?

That depends on how brave Dave Lewis is feeling. Right now he is the man who saved Britain’s biggest retailer but taking on Lidl and Aldi in a head-to-head fight involves enormous risk. For one thing, trying to be the disruptor in an already disrupted market will be hugely expensive. It also risks under-cutting your own brand.

On top of that, there are still some obstacles on the road ahead. The Serious Fraud Office is seeking a retrial of three former Tesco bosses accused of cooking the books. The brand is also facing Britain’s largest ever equal pay claim from thousands of female workers. That could lead to an eventual bill of around £4bn.

Tesco’s recovery has been phenomenal but it is not out of the woods yet. For Tesco, the days of expansion into China and America are well and truly over. Rebuilding confidence at home is a big enough job.