Bruno Monteyne, Bernstein

This is Tesco cleaning up its practices and accounts, before people had expected it. The bulk of the reset today is explained by the changing nature of supplier contracts. In technical terms it’s moving from back margin to front margin. This is good news and allows retailers to work better together with suppliers. Good news is also that a lot of that profit drop is a timing issue, most of that profit drop comes back later. It’s also investing in a customer proposition- bit better prices), bit more staff, etc. 

Lewis is saying no more ‘diving for the line’: those are naughty operational tricks to flatter profits towards year end … but are damaging to consumers and the brand. He is stopping that … which is good for Tesco long term.

 

Neil Saunders, Conlumino

Tesco needs to invest in both pricing and improving the shopping experience for consumers. When such investment is made against a backdrop of falling sales it will inevitably impact profitability. However, such a move is a necessarily evil; the price of failing to accept a reduction in profit would simply be the continued deterioration of the business.

The question is whether or not the measures Tesco is now taking will allow is to increase its market share once again. The competitive environment in grocery is so intense that it is not possible for all players to grow. 

There is now a sense that expectations around margins and profits in grocery need to be reset. Tesco’s announcement today is part of managing that expectation. It remains a profitable and successful business but in our view the days easy growth and easy profit are now firmly over.

 

Julie Palmer, Begbies Traynor

Another day, another profit warning. Dave Lewis is working hard to rebuild Tesco’s brand with shoppers by investing more in price reductions, short-term promotions and extra staff hours, but today’s profit warning implies more serious woes for the company as it struggles to maintain its leading market share, with UK grocery trading losses expected in the second half of the year.

For some time, UK consumers have been voting with their feet, preferring the combination of value and quality provided by Tesco’s smaller peers, and with today’s negative share price reaction, it seems investors too are heading for the checkout.

 

Danielle Pinnington, Shoppercentric

Let’s hope the focus can quickly turn from internal issues to the customer. The sooner Tesco work out how to deliver what customers want in terms of range, price, environment and service, the quicker they will start to reconnect. Of course this assumes they are talking to customers - the change required can’t be based on purely on assumptions or intuition. Shoppers needs must be at the heart of the turnaround planning.

 

David Gray, Planet Retail

£1.4bn represents quite a sharp downgrade and it shows that Tesco have been spending trying to sort out the problems in store, with the 6,000 extra staff. They have also been very aggressive of late in their vouchering and promotional activity with vouchers as they try to win customers back. They are trying to reset the business which might take many years and it also has big knock-on implications for the whole of the supermarket industry.

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