Despite a competitive grocery market and subdued consumer spending, Tesco PLC (LON:TSC) has managed to retain its position as the UK’s No.1 supermarket chain by market share.
Under the leadership of Dave Lewis, Tesco has staged a recovery through a five-year strategy that has included revamping products, cutting prices and improving customer service by putting more staff on the shop floor.
At its 2018-19 annual results in April, Lewis said Tesco was on track to meet the “vast majority” of its strategy goals and expects the turnaround plan to be completed in the full year to 2020.
Amazon and discounters pose threat to Tesco
Adding to the threats facing Tesco, Amazon.com Inc (NASDAQ:AMZ) and WM Morrison Supermarkets PLC (LON:MRW) announced on Wednesday that it would be expanding its same-day grocery delivery service to at least five more UK cities this year.
Marks and Spencer Group PLC (LON:MKS) has also raised its game with plans to launch an online grocery service through a joint venture with Ocado Group plc (LON:OCD). However, a rights issue held by M&S to fund the deal has not been well received.
“Tesco has developed an astute understanding of the customer of today, and wartime general Dave Lewis has unapologetically optimised Tesco to suit their needs,” said Thomas Brereton, retail analyst at analytics firm GlobalData.
“But with the tribulations of Tesco five years ago now almost erased, it now must start to prioritise long-term strategy to ensure true longevity.”
First-quarter results disappoint
In its first quarter results on Wednesday, Tesco reported a slowdown in sales growth but this was largely due to the fact that the year-ago period was boosted by a UK heatwave, the royal wedding of Prince Harry and Meghan Markle and the FA Cup final.
A 0.4% like-for-like rise in UK sales was seen as the biggest disappointment as the consensus analysts’ forecast was for a 0.8% increase.
“Today’s trading update from supermarket Tesco was probably about as good as could have been expected under the circumstances,” said AJ Bell investment director Russ Mould.
“The build-up to last year’s World Cup and the sunny temperatures meant it was always going to be a tough ask to generate much like-for-like growth this time round as the UK endures some very soggy weather.”
He added that competitive threats remain at large with recent industry figures showing the ongoing advance of Lidl and Aldi and Morrison announcing an expansion of its joint venture with Amazon.
Mould said: “Amazon is a name which can strike fear into the hearts of established operators in a host of different industries and Tesco is unlikely to be an exception.”
Investors turn attention to next week's capital markets day
Tesco left out the outlook for the business in the first-quarter update with CEO Lewis likely to be saving the deals for the company’s capital markets day (CMD) on June 18.
Investors will want to hear what Lewis has planned for the business once his current turnaround plan completes.
So far his strategy has paid off.
Turnaround plan leads to share price recovery
Since Lewis joined Tesco in 2014, profits and sales have rebounded along with the share price.
His rescue mission wasn’t an easy task, having taken the reins shortly after Tesco was rocked by an accounting scandal and as the retailer was suffering a continuing downturn in sales and profits.
Over the past year, the 2017 acquisition of UK wholesale business Booker has helped to lift sales and deliver cost savings.
Lewis has also improved Tesco’s buying power through a “strategic alliance” with French retail giant Carrefour, which became operational last October.
The two are working together to demand better terms with global suppliers in an attempt to drive down costs, allowing for price cuts to lure in customers.
In a bid to tackle the threat posed by Aldi and Lidl, Tesco recently launched a new discount chain called Jack's. Tesco said it had received a "strong response" to the stores so far.
“The radical overhaul which the business has undergone has seen Tesco’s shares rise by 50% over the last three years,” said Richard Hunter, head of markets at Interactive Investor.
“More recently, the acquisition of Booker is continuing to look like a masterstroke, the tie-up with Carrefour should provide further benefits and the launch of ‘Jack’s’ should prove an interesting move in the discount store space to its challengers.”
Future prospects 'looking bright'
But Hunter said the share price performance more recently has been “mixed”, with a 9% decline over the last year, compared to a 4.4% dip for the wider FTSE 100, but a near 15% rise over the past six months.
On Tesco’s upcoming capital markets day, he added: “Ahead of the update next week, where the company plans to unveil further value opportunities, and with many of its strategic plans already showing signs of success, prospects for Tesco are looking bright in the eyes of the market, where the general view of the shares as a strong buy remains intact.”