Both of its house brokers are forecasting that Tesco (LSE: TSCO) will reveal a year-on-year sales decline of 4% when it unveils first-quarter results on Wednesday, markedly worse than the 2.9% reported three months ago. Though those expectations ought to be built into the share price, confirmation of the accelerated decline would undoubtedly be accompanied by a welter of negative press, and shareholders should brace themselves.
But to get a feel for the long-term trajectory of Tesco’s shares, whether we’re witnessing a long-term decline or just a long road to recovery, we need to delve deeper into what’s going wrong.
Foot dragging
In the supermarket price war, Tesco has been dragging its feet and is losing sales to cheaper rivals. The management duo of CEO Philip Clarke and former finance director Laurie McIlwee only reluctantly abandoned their sector-leading 5.2% margin target last February — promptly followed by Mr McIlwee’s departure.
Tesco then said it would invest £200m in reducing prices. On the face of it, that’s a comparable figure to Morrisons‘ £1bn over three years and Asda’s £1bn over five years, but when you consider that Tesco’s sales are roughly double the others’, it looks timid. Analysts and major shareholders have been queuing up to call for Tesco to make bolder cuts.
With by far the largest market share, and historically the largest margins in the sector, Tesco should be best placed to come out on top of a price war. Why have management been so cautious?
Anchoring
I think the answer lies in the psychological trait of anchoring. Savvy investors understand how cognitive biases can skew rational analysis. Anchoring happens when decision-making is unduly influenced by irrelevant data: we’re all familiar with the situation of having an emotional attachment to the price a share once traded at, even though rationally we know it shouldn’t affect the decision to buy or sell based on current reality.
Anchoring happens in all sorts of spheres, and is hard to shake off. Tesco’s management are stuck in the mind-set of past glory – and fat margins. It doesn’t help that there has been no fresh blood in senior management, and Mr Clarke has seen off most of the long-serving top executives, too.
It would take a major change of attitude — or, more likely, change of management — before Tesco really flexes its muscles. Shareholders could be in for a rough time until that happens. But the company’s inherent advantages should see it come good in the long run.