Whenever I look at Tesco (LSE: TSCO) these days, I’m torn between two questions.
Is it really too cheap? Or is Warren Buffett right?
On the one hand, the UK’s biggest groceries retailer has seen its share price crash by 52% over the past 12 months, heading dramatically downwards in a year which many of us previously had down for a tentative recovery. When Tesco put in that bad Christmas in 2011, I expected it to be a short-term blip and I thought we’d be recovered and back to growth in a year or two. But we must surely be getting near the bottom now, with the price down as low as 174p, mustn’t we?
Not paying attention
But I really hadn’t noticed how my local branches of Lidl and Aldi were getting busier and busier year by year — the change had been creeping up on me, even as I shopped at Tesco and Aldi on opposite sides of the same street, and I just hadn’t twigged.
Ace investor Warren Buffett has famously now described his £1bn stake in Tesco as a “huge mistake“, and has since dumped around 250 million shares, so perhaps we can be forgiven for getting it wrong in such illustrious company. But I still kick myself for having my feet on the ground, literally, and not taking notice of what they were showing me.
Is there a way back?
All along, I’ve thought there was, but a few thoughts are making me re-examine that stance.
Where’s the action?
Firstly, we heard plenty of fine words from the old Tesco management, and new boss Dave Lewis impresses me with his commitment to change. But you know what? I haven’t heard a single concrete proposal of what actual change we’ll see — it’s all stuff about recovering competitiveness, rebuilding trust, the beginning of a new phase…
Oh, wait, there has been one firm action — cutting prices.
But if that’s the only answer, then I think the days of the old Tesco are permanently in the past.
I remember the old pile it high, sell it cheap days of supermarkets, before Tesco and others started upping their social profile and making shopping there seem like a nobler pursuit than merely buying cheap food. But the sector clearly lost its way and became hooked on margins that were really too high for a free competitive market. Had that not been the case, there just wouldn’t have been the opening for Lidl and Aldi to get in and undercut prices so drastically.
The man from Omaha is right
The more I look, the more I’m convinced that the days of premium supermarket branding are over, and that Lidl-style pricing is here to stay — or at least, there’s only a relatively niche upmarket segment that’s currently overpopulated.
I reckon we’re in a new sell it cheap era, and we need to get used to lower prices, slimmer margins and modest dividends. You’d need a strong constitution to invest in Tesco this Halloween!