The Business Of

Tesco | Outlook

Morning All!

It is Friday, and we’ve covered quite a bit so far this week. So we’ll keep it light and a bit shorter today! For the final section, we’ll look at the outlook for Tesco and the UK supermarket industry. After all, we now know what the company does, how it makes money, what its costs are and what it does with its profits. But we also need to look at the future and how those elements could potentially change. And we’ll do this using characteristics of the SWOT analysis, which many readers will be familiar with.

T = Threats

As we mentioned in the ‘What Do They Do’ section, the UK supermarket industry is an oligopolistic one and Tesco has been the market leader for a long time. However the landscape has been changing over the last 10-15 years…

Aldi and Lidl have made a huge dent in the traditional ‘Top 4’ with Aldi actually overtaking Morrisons as the #4 player in the UK. The rise of these German brands over the last decade has coincided with the extended period of austerity. Many families - feeling the effects from the global financial crisis in 2007/08 - began shopping for cheaper, own-label goods and made the switch to Aldi and Lidl.

Now, I know what you’re thinking. If families are going to Aldi and Lidl because products are cheaper - why don’t the other supermarkets just lower their prices? Well, that’s exactly what Tesco and Sainsbury’s did! Okay, they were both slightly late to the party - Tesco only launched their ‘Aldi Price Match’ campaign in 2020 and Sainsbury’s in 2021 - but the campaigns have helped the perception of prices in shoppers’ minds. Below we can see how Tesco and Sainsbury’s have marketed their campaigns.

Time will tell how effective these campaigns will be for Tesco and Sainsbury’s in maintaining their market share.

S = Strengths

You often read about companies expanding operations, coming up with new products, going into new geographies, etc. But sometimes, the best thing a company can do is focus on its strengths and actually streamline their operations. This is exactly what Tesco have done.

Over the last 5 years the company has focused on closing operations outside the UK to concentrate their attention on the UK, its crown jewel.

But why would they do this? After all, doesn’t closing stores mean a loss in those revenues. Correct. But it also means that the costs that were previously used to operate those stores can be moved over to opening more UK stores, or refurbishing current UK stores, etc.

Also remember, the Central European retail segment will have lower margins than the UK retail segment. This is because of the purchasing costs we talked about in the ‘What Are Their Costs’ section. Costs per unit fall with volume (economies of scale) and because Tesco purchases far more for their UK supermarkets than their C European ones, their costs are far lower for the UK segment… meaning their margins are far higher. The graphic below will help illustrate this!

That’s All Aisle For Now

So that brings us to the end of Week 1 of The Business of Tesco newsletter! This week we’ve dug into;

(i) what supermarkets do,

(ii) how they make money,

(iii) how much it costs to operate their business model,

(iv) what they do with their profits, and

(v) what the future might look like in the industry!

But it’s not quiteeeee the end. Because we have a special newsletter being released imminently!

24th Feb 2023

Nigel Jacob CFA