Shares in Britain's largest grocery store and largest
, took a hit on Friday as the company announced a reduced
forecast and a cut in its dividend. It's the third time this year
that the retailer has had to cut back on its outlook, and the
stock has fallen 31% year to date. Competitors have suffered
similarly, and the future of British grocers is starting to look
Tesco takes another hit
Tesco cited "challenging trading conditions and ongoing
investment in [its] customer" as the major factors that brought
the business down. Both are tied to the slow recovery the U.K.
has undergone in the wake of the financial crisis. The Bank of
England said earlier this week that the country may be set with a
new normal for wage growth, well below the level set
That's put a pinch on shoppers' purses and forced Tesco into a
position where deep discounts are the name of the game. The
company was already known for its low prices -- its motto is
"Every Little Helps" -- but the depth of the discounting has
In its trading update, Tesco also announced it would be
bringing in a new CEO a month ahead of schedule. The company's
first external CEO, Dave Lewis, joins Tesco from
Unilever and will be replacing Philip Clarke, who was kicked
out after the company's July profit warning.
A downward slide
Tesco isn't alone in its fall, as many big British brands have
been suffering recently. Competitors
have also been hit, with shares falling 21% and 32%,
respectively, in 2014. All three brands have seen declines in
comparable sales over the year, as customers simply
hold on to more of each paycheck.
The difficulty for the brands is that they've now entered a
spiral that takes profits and margins further down. As customers
have less to spend, prices have to fall to entice shoppers in,
which means lower price expectations across the board, which
means deeper discounts are required.
To counteract some of the sales damage, Tesco has cut back on
other investments. That includes slowing down the pace of its
store refresh program -- never good for sales -- and decreasing
investment in IT infrastructure. It's also what led the company
to cut back on its dividend, which has dropped 75% compared to
The bottom line
Tesco is in a bind. Analysts have suggested that now might be the
time that the company cuts back on international positions, which
have failed to bring in big gains. The company currently
generates about 30% of its revenue outside of the U.K., and
falling back into a smaller position could free up all kinds of
cash. On the other hand, the retailer's Asian business has had
some success, and it could help support the company if it
continues failing at home.
In the long run, what Tesco really needs is to break free from
the downward spiral it's currently caught up in. The company's
new CEO may be full of good ideas, but until he can get shoppers
to come in for the brand and not for the savings, Tesco is going
to be in the same sad spot. There's likely more bad news coming
before things turn a corner.
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Britain's Biggest Grocer Takes One on the
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