When I think of supermarket-chain Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Powerful brand
Just about everyone in Britain must have heard of Tesco and possess at least some understanding of what the company does for its business. Tesco is more or less everywhere in the country close to people. When we use a Tesco store, whether big, small or medium in size, we tend to do so knowing what to expect when we pass through the door. We know the colour scheme, the approximate arrangement of the store’s layout, the products that will be available to buy, and the process that we will need to complete to buy the products for sale. As likely as not, we will have returned to the store because on a previous visit we found the experience satisfactory. We are, therefore, exhibiting brand loyalty.
I’d argue that Tesco is more than just a brand in Britain, though; it is a super brand. The firm’s critical mass in Britain makes it hard for competitors to usurp Tesco. There’s already a Tesco store in every worthwhile consumer area. If a competitor starts up in a location, there’s a good chance that it will be competing geographically with Tesco right from the beginning.
Tesco generates about 60% of all its sales in Britain, so its brand here is a strong platform upon which to build further business lines and growth. For example, Tesco bank generates about 1% of sales and the firm is expanding abroad with about 16% of sales coming from Asia and 13% from Europe.
2) Consumable product lines
Tesco’s core business is the sale of food; we buy it, we eat it, we buy it again, and again, and again. Dealing in a product with such rock-solid repeat-purchase credentials can be a resilient strength. Regular repeat business can lead to reliable and steady cash flow, which the firm can use to reinvest into the firm’s operations for maintenance and growth, or to reward investors through the dividend.
Combining Tesco’s powerful brand with its consumable product range creates significant economic advantage.