Today I am looking at why I believe Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) remains a risky investment for cautious investors.
The squeezed middle becoming more constrained
Tesco’s main mid-tier rival J Sainsbury has been able to negotiate the top-and-tailing of the UK grocery market by low-end outlets such as Aldi and premium retailers like Marks & Spencer. But while its Sainsbury saw sales increase 2.7% in the 12 weeks to February 2, according to Kantar Worldpanel, Tesco was not able to follow suit and saw sales fall 0.3% during the period.
Not only has Tesco failed to effectively develop the quality and image of its in-house brands — a point exacerbated by last year’s horsemeat scandal — but question marks have also risen over whether Tesco offers decent value for money compared with its competitors.
Continued erosion in activity at the tills has weighed on Tesco for many months, and the firm’s share of the British grocery market now stands at 29.2%, a marked fall from 30% at the same point last year. By comparison, Aldi saw its market share accelerate to 4.1% from 3.2% during the same period, while Waitrose’s share edged to 4.9% from 4.8%.
Total grocery spend also deteriorating
Not only is Tesco having to deal with operating in a rapidly-declining middle tier, but it is also having to contend with total spending growth at Britain’s grocers running at multi-year lows.
Although the UK economy is undoubtedly on the mend — the Bank of England upwardly revised its 2014 growth forecast to 3.4% from 2.8% in recent days — this is yet to be translated into a rapid expansion in consumer spending power.
Indeed, Kantar Worldpanel commented that
“grocery market growth slipped slightly to 2.4%, indicating that brighter economic prospects are yet to be seen in the nation’s shopping trolleys,”
and added
“The slowest industry growth since 2005 made it hard for many of the biggest retailers to increase sales.”
International operations remain weak
But Tesco’s sales woes are not just confined to the UK — excluding petrol, total international sales dropped 2.2% during the six weeks to January 4. In Asia sales fell 3.4%, with political instability in Thailand weighing heavily on performance in the region. And in Europe the impact of enduring macroeconomic pressure prompted revenues to dive 0.9%.
Even though Tesco drew a line under its catastrophic foray in the US by giving away its Fresh & Easy franchise last autumn, and also scaled back operations in China by combining its stores with those of China Resources Enterprise, the supermarket still has much head scratching to do before it can rectify its ailing fortunes in foreign climes.