In a big warning for retailers large and small about losing your way and not responding to market threats until too late, Tesco, the UK’s biggest chain store, has been forced to slash interim dividend 75% as it faces up to a 900 million pound ($A1.6 billion) fall in trading profits in 2015.
That follows a sharp fall in sales and market share by Britain’s biggest retailer as it battles intense price cutting from so-called hard discounters in Aldi and Lidl of Germany.
A month or so ago we noted the weakness in global retailing stocks, from the US, to the UK, Europe and Australia. If anything it has worsened in the UK and much of the US since then
That weakness continues and in the next few weeks some of Britain’s biggest retailers will follow Tesco (which balanced its first half books on Sunday, August 31) in revealing lower earnings and downgrades.
The problems in the UK sector has some echoes in Australia where the level of competition might be far less intense, but where trading conditions are "challenging’ to quote a chorus of retailers in their 2015 outlook statements issued last month.
The latest results from Woolworths (WOW) and Coles and other chains owned by Wesfarmers (WES) were solid, but Woolies in particular surprised with a miserly increase in final dividend by just 1.4% rise in the total payout, despite an 8.5% rise in annual profit.
Woolies is struggling to turn losses in its hardware business into profits, while its Big W department store chain has lost its way, as has Wesfarmer’s Target chain.
Perhaps the Woolies board is telling us that they see a need to be conservative financially in the coming year, whereas Wesfarmers showered cash on its shareholders.
The price competition in the Australian supermarket sector is nowhere as intense as in the UK, but Aldi is growing here (Lidl has yet to appear) and sales growth has slowed in the past year or so, but remains above the rate of inflation.
But for UK grocery chains, it’s a disaster zone and no one retailer was more exposed, than Tesco, Britain’s biggest store chain, after a couple of trading downgrades, and then sacking the CEO of three years.
The weakening trading and two downgrades has seen the retailer’s shares plunge by 37% so far this year, up to Friday. The shares fell a further 1.9% on Monday in London. It has it has been slow to respond to intensifying price competition from German super hard discounters, Aldi (which operates in Australia) and Lidl.
They sell a much smaller range of goods, advertise very little, stock predominantly own brands and operate on profit margins estimated to be a third those of their bigger rivals.
The price cutting from these two retailers, has seen other bigger chains, such as Sainsbury, Asda (owned by Wal Mart), and Tesco trying to fight back with price cuts of their own.
So intense has been the price cutting that grocery prices in the UK are now falling in real terms for the first time for a decade.
Growth has slowed to just 0.8%, which is less than half the rate of inflation of 1.9%.
The impact of the price cutting by the German duo can be seen from the latest market share figures from research company, Kantar Worldpanel for the 12 weeks to August 17.
Tesco saw its sales fall 4% from a year earlier (the biggest fall of all grocery retailers), with its market share dropping to 28.8% from 30.2% a year ago.
That 4% sales fall has hacked into Tesco’s bottom line, and the trading downgrades has seen the share price fall to levels last seen in 2003!
In contrast to the pain being felt by Tesco and others, Waitrose, the upmarket grocery chain were up 3.6% from a year earlier, and its market share edged up to 4.9% from 4.8%.
But it is having to trim prices to keep up with other retailers.
Sales rose 29.5% at Aldi and by 18.3% at Lidl, compared with the same 12 week period in 2013.
Both chains maintained their record market shares of 4.8% and 3.6% respectively, helped by half of UK households shopping at either outlet in the past 12 weeks, Kantar said.
Aldi’s market share rose to 4.8% from 3.7% a year earlier, while Lidl’s share climbed to 3.6% from 3.1%
That forced the retailer’s board to sack the previous CEO, Philip Clark and lower profit guidance in July, after a cut two months earlier.
On Friday the horrible truth for the giant and its shareholders emerged in the third trading downgrade of the year, plus news of the slashed dividend and brought forward to tonight the starting date of the new CEO, Dave Lewis, instead of a month’s time.
The update came two days before the retailer rules off its books for the first half of the 2014-15 financial year
On top of the reduced dividend, Tesco has taken an axe to investment, cutting it by 400 million pounds and taking the reduction compared to 2013-14 to 600 million pounds.
Tesco said profit for the 2014-15 year would be in the range of 2.4 billion to 2.5 billion, down from its previous forecast of 2.8 billion, and 3.3 billion pounds last year.
Trading profit for the six months ending August 23 would be roughly 1.1 billion pounds, down 600 million pounds from the figure for the first half of 2013-14.
Now Tesco has provided much of the retailing ideas for Woolies and Coles here from the design and layout of stores, price attacks on single products such as bread and milk, to moving into financial services, such as banking and insurance, as well as growing their liquor offerings, and using fuel as a loss leader in some respects to try and build brand loyalty.
Aldi and Lidl are now moving into fashion in Britain, especially women’s clothing, to further pressure the likes of Sainsbury, Tesco and Asda and perhaps the venerable department stores such as Marks and Spencer.
The lesson for Coles, Woolies and Metcash here is that if retailers lose their way and forget that selling groceries (as well as fresh food) to customers at the lowest possible profitable price, then they and their shareholders will suffer.
Tesco’s woes show us that no amount of extra loyalty card offers, add on restaurant chains, petrol price offers, financial services and the like can save a retailer who forgets that its price, price, price, which is the only point of difference that Aldi and lidl are offering.
