Jonathan Pritchard asks whether Tesco's strategy is based on the recession - or overseas expansion
As year-end approaches, it appears Tesco is pulling out all the stops in order to cut costs.
Furthermore, the UK capital expenditure budget is being reined in. So is this simply the behaviour of a good management team at a time when belts are being tightened everywhere, or does it betray more deep-seated problems?
Chloe Smith's article in last week's issue of The Grocer outlined Tesco's plans to "wring out" costs from the business. Tesco will achieve this in two ways: one will help the P&L, the other the cash flow.
Firstly, Tesco is said to have turned the screw on suppliers, cut head office costs, and asked its own staff to seek out further efficiencies in store. Year end is 28 February, and while, over the years, Tesco's almost obsessive approach to ratios is well known, we would not be surprised if a final push was being made with this date in mind over the next two weeks.
But how much further can Tesco push? Like-for-like volumes in food are some variation of zero right now (the lowest of the big four) and this makes ratios - be they at the gross margin or the operating margin level - all the more difficult to point in the right direction.
We think 2009/10 will be a very interesting year for Tesco: will it be able to regain its food volumes poise and give itself some breathing space on margins?
Tesco will report about £8bn of debt at the final results in April. From a gearing perspective, this is not problematic, but we do not think Tesco is comfortable with a much higher level of debt.
The retailer is highly committed to growing its overseas business, which is expensive, and it is largely UK cash that is being used to finance the expansion.
We understand that Tesco will spend £1bn less in the UK in 2009/10 than it did in the current financial year. The majority of this spending cut will come from either reducing store extensions, or lowering the spec. But does this let the opposition off the hook?
Tesco is a fine company and one of the UK's best exports. However, the demands that the overseas businesses are placing on the UK cashflow and the management team are growing. It can only dance at a finite amount of weddings. Tesco will probably deliver on market expectations for 2008/09, but will the same be true in 2009/10 and onwards?
Jonathan Pritchard is a partner at Oriel Securities.
As year-end approaches, it appears Tesco is pulling out all the stops in order to cut costs.
Furthermore, the UK capital expenditure budget is being reined in. So is this simply the behaviour of a good management team at a time when belts are being tightened everywhere, or does it betray more deep-seated problems?
Chloe Smith's article in last week's issue of The Grocer outlined Tesco's plans to "wring out" costs from the business. Tesco will achieve this in two ways: one will help the P&L, the other the cash flow.
Firstly, Tesco is said to have turned the screw on suppliers, cut head office costs, and asked its own staff to seek out further efficiencies in store. Year end is 28 February, and while, over the years, Tesco's almost obsessive approach to ratios is well known, we would not be surprised if a final push was being made with this date in mind over the next two weeks.
But how much further can Tesco push? Like-for-like volumes in food are some variation of zero right now (the lowest of the big four) and this makes ratios - be they at the gross margin or the operating margin level - all the more difficult to point in the right direction.
We think 2009/10 will be a very interesting year for Tesco: will it be able to regain its food volumes poise and give itself some breathing space on margins?
Tesco will report about £8bn of debt at the final results in April. From a gearing perspective, this is not problematic, but we do not think Tesco is comfortable with a much higher level of debt.
The retailer is highly committed to growing its overseas business, which is expensive, and it is largely UK cash that is being used to finance the expansion.
We understand that Tesco will spend £1bn less in the UK in 2009/10 than it did in the current financial year. The majority of this spending cut will come from either reducing store extensions, or lowering the spec. But does this let the opposition off the hook?
Tesco is a fine company and one of the UK's best exports. However, the demands that the overseas businesses are placing on the UK cashflow and the management team are growing. It can only dance at a finite amount of weddings. Tesco will probably deliver on market expectations for 2008/09, but will the same be true in 2009/10 and onwards?
Jonathan Pritchard is a partner at Oriel Securities.
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