Friday, January 13, 2012

Tesco - request for comments

The number of problem long investments in my portfolio doubled overnight - from one to two. (We have some small problem longs and some large longs with more minor problems - and some problem shorts but only two largish positions that are doing poorly.)

The treacherous two are the (much discussed) Bank of America long and the (less discussed) Tesco. Bank of America is a bank - therefore highly levered - and therefore total disasters can't ever be discounted. But Tesco is a grocer with a seemingly impregnable position in the UK and some positions elsewhere that may or may not be fine. It is hard to see how you compete with Tesco in its core business - and hence it is pretty hard to see how they get into real trouble. They have debt (driven by the demands of investors during the last cycle to "sweat the balance sheet" but the debt should not be problematic and the repayments are fairly rapid.)

I thought Tesco was my "safe" long. The relatively safety made the position bigger!

Oops.

On Tesco, I was sceptical of their expansion into the United States. Grocers (indeed retailers in general) have a poor record of crossing borders - there are plenty of cultural differences.

More to the point it is fairly easy to open up in competition in the US - there are vacant big-boxes everywhere and soon to be more - but it is very hard to open up in competition in the built-up cities of the UK. The UK is thus naturally a good business (hard to compete with) and the US less so. [Contra: I guess that is why they open in the US - because they can get sites...]

But when I revealed the position one of my regular correspondents (and obviously smarter than me) admonished me. He thought the American positions would be fine but the UK was going to be problematic - he thought margin declines could be nasty. And that is how it looks right now - the US has very good sales growth - the UK rapidly falling sales growth (a very bad second derivative) and declining margins to boot.

Margins may be the end of this story - but maybe there is something else. After all the competing retailers did well over Christmas - the problems look Tesco specific.

So here is a request for comments. When I was last in the UK (both recent trips) I did not step out of the international city of London. Oxford Street is visibly doing quite well. But the UK is not. My friends with businesses over the UK describe the city as a cocoon in which you can comfortably shop and see no problems with the world. Go to business parks in Edinburgh once built for grand financial institutions and it looks different.

So here is a request - and it is a request for my (relatively few) UK readers outside London. What is going on at Tesco and Sainsbury in places like Leeds or any other major regional city in the UK? Is there a reason why the problems appear Tesco specific? Is Tesco deliberately going down market (they appear to be in recent promotional videos).

My hopeful request to readers is for someone to conduct an "apple freshness test" in a regional city. For this test you buy an apple from each of the local grocers on the same day and leave them on the shelf to see the order in which they rot to the point you would not eat them. Twelve days is generally pretty good - it means the supply chain is fast and efficient. Eight days less so. The grocer that loses the apple freshness test eventually loses the reputation for fresh food and will (inevitably) lose margins and profits. This is something that happens imperceptibly - but women (and they are mostly women in this case) are very good subjective judges of where to shop.

The "apple freshness test" is the core here. The company says that at the "heart" of what they need to do is fresh foods. Fresh foods is only partly about what happens in the store. To be fresh they need to deal with the chain.

Hoping for help from my readers.



John

It is a small (meaning worthless) consolation that the two stocks on which I am suffering are the ones Warren Buffett has been buying. I am losing money in good company - but they are losses just the same. (Unlike him though I have some winning short-sales...)

75 comments:

Clement said...

What if grocers buy apples with different levels of preservatives?

Just a thought

BlackRaven said...

It was a subject discussed over xmas with family and extended family as a matter of interest. And there are several things that came up from the small sample of people;

1) the other supermarkets are catching up with regard to online shopping.
2) Tesco is not seen as being the best value anymore, Asda is. That is new.
3) Sainsbury's offers meat offers were really popular.

I'll ask a few of them to do the apple test and report back.

John Hempton said...

In response to the Clement comment - as long as the preservatives are not-detectable to the customers it should not affect the result. Getting the right product (even if it is well preserved apple) is key in fresh food.

Cynical I know.

J

And thanks BlackRaven - wish I had heard that BEFORE.

Mokwit said...

All I can tell you from shopping daily at a Tesco minimart in SE London in Sept is that they seemed obsessed by freshness - I'd see some fruit and think I'll buy that tomorrow and it was gone - bought or discarded admittedly I don't know. Hope this is better than nothing. Surely the announcement that Terry Leahy is to step down/has stepped down is creating sellers?. I suspect he actually is one of those fabled 'key' CEO's and respect what he has done immensely - when I was growing up in the '70's Tesco stood for cheap and shoddy to the point where it's name was used to indicate derision to something.

Steve Johnson said...

I don't have anything to add on the UK but I've thought a lot about Woolies and Coles in Australia. When the gap was at its biggest, Woolies was making 6% margins and Coles 3%. That shows you Woolies is a better business than Coles.
But the risk of the gap narrowing worries me. Coles' new owners will be perfectly happy with a 4% margin, 5% would be a disaster for Woolies. So, if Coles can get its act together on the efficiency front (which they are doing), you've got a competitor that is going to be very happy making lower margins that you are. That's a problem.
No idea if the same dynamic is playing out in the UK but high margins aren't always a good thing.

Anonymous said...

The shopping experience at Tesco is subpar:

1) not enough staff,

2) queues too long and,

3) too many under-stocked shelves

Kevin said...

Cash retailers are very leveraged too - but operationally. But like banks, this makes them vulnerable to management stuff ups. Tight margins and rapid asset turn mean errors hurt you fast.

Comments after UK press articles on the profit warning said that loyalty club members were not posted their discount vouchers for December, but could only access them online. If you think that the new management have learnt from this mistake, well it is easily reversed, and given the great franchise value of high market share (supplier volume rebates)it must now be a buy.

However if this is evidence that the new team is not up to the job....

Rahul Deodhar said...

Interesting idea of freshness test.

Just thinking if there is a change in buying-consumption time lag? Is it affecting lot sizes of purchases.

I don't think it should happen for food though.

DavidMo said...

I agree with BlackRaven. Where Tesco 'own' a town like Dorchester they still do well. All Dorchester has is small express versions and a Waitrose (that even tho they price match is seen as expensive). Tesco in this town also does fuel which pulls in. However in towns like High Wycombe Tesco is loosing to newer built Supermarkets that make the simple stuff (parking) easier. Tesco as a brand has always been the 'peoples' supermarket even with their Finest range, but as said Asda is competing on every level and improving, esp in customer service. I also wonder if their brand and message is now confusing, their web site now sells cars!

persistentone said...

Maybe I am missing the value calculation, but Tesco is showing a sub 5% return on equity, and they are telling you they are a negative or flat growth story. Where is the value? At 1/3 of book value those numbers might get a second look, but trading well above book I do not see it.

Look at the response from management that they will address this failure by training staff. That actually makes it sound like they don't know the reason why the new strategy failed, and they are simply reaching for anything to look decisive.

Technically they might get a bounce at 300 level, but this does not look interesting to me until it gets near 150.

Riccardo said...

Tesco are between a rack and a hard place! They aren't really doing anything wrong but they are being attacked from both sides, at the higher end Sainsburys and Waitrose are winning customers away. In the mid ground Morrisons are doing a good job and have (marginally) increased sales. At the low end Asda and Lidl are becoming more and more popular.

It's simple really, Tesco were ahead of the crowd but the crowd have caught up.

Tesco are still strong and will remain so, but it is getting harder!

Sleeper said...

I'm not based in the UK so I can't add to your freshness test.
What I can say is that I'm an active member of a UK-based forum that actively discusses retail issues in the UK. One of the members works for WH Smith (high street stationery/bookshop) and says that there are going to be a lot of well-known high street names going out of business as the Christmas period was well below hopes. This is more sector gossip than a specific reflection of Smiths' position.

This affects Tesco in that a lot of their higher margin items are bought from competitors via the internet. So they lose a lot of their non-food cushion. This leaves them fighting it out on the food front, where the margins are cutthroat.

The issue for an investor is whether you are confident that management has the intelligence and the information systems to confront this challenge. Tesco has done a good job of this so far, but if you talk to management, ask them about their MIS - most analysts don't.

My gut feeling is that Tesco's is a good name to be in, but you might want to look for a less good competitor to hedge away the sector risk.

grammie said...

My parents live in Leeds and they have the option of Sainsbury's, tesco and asda (plus other smaller m&s food etc). They shop in all of them apart from tesco. Tesco is placed in seacroft, an area of high unemployment and the clientele can be a little intimidating. I am choosing my words carefully, let's just say when I take my wife to Leeds and we drive through areas like seacroft, she is open mouthed. I come from a large extended family and the ones that have been successful do not live in this area, the many that continue to live on benefits and hand outs do. The quality of the food isn't the problem it's the placement of the supermarket and their target market. I just called my mum to check and she said that tesco is also dirty and disorganized.

Dave said...

One of the 'edges' Tesco had was its club card. It held a large stake in the data analysis company Dunn Humby that helped them make sense of all shopping patterns and buying habits of its customers. It wasn't just a reward program, its a data collection point. Their analysts were the best at helping Tesco know what vouchers would tempt them from a rival store, whether to send money off coupons or more points etc and in-store analysis of what promotions should go together.

As often happens, the brightest and the best left for Sainsbury's rival reward program Nectar. This is available across different brands such as BP and is offering the same level of analysis on customer behaviour that for a while only Tesco had.

On a more subjective level, I find the Tesco branding to be cheap and rather clinical in store. Yes its all about value, but we're human its also about the shopping experience.


I recently went to Sainsbury's and received a coupon for £2 because my shop on branded goods would have been cheaper with a rival. So not only is the shopping experience better, they are taking away the 'risk' or the perceived fear that you could have got the shopping cheaper elsewhere. Very clever.

Hope this helps

Anonymous said...

Well, if you're after woman's touch, then my wife would tell you to sell Tesco while you can. And this is from someone who was reasonably happy with Tesco for years.
Her list includes:
- already mentioned unstocked shelves
- less of diversity than it used to be
- noticeable (to her) lack of freshness (this was actually her main complaint for the last year or so, and it is the same in two different large Tesco supermarkets about 20 miles apart).
- value's gone

Kevin said...

In Ireland where Tesco have been very dominant in the past, they're getting squeezed very hard on prices by low cost German retailers Lidl and Aldi - margins and volumes are being hit. This is much more of a problem for them than their traditional competitiors

Revilo said...

John,

I think one of the big risks that Tesco faces is that over the past few years it has diversified away from food retail. With consumers under pressure, non-food retail is suffering (just look at the share prices of UK non-food retailers).

My personal view is that the brand is looking a bit tired, and even amongst middle class londoners its become trendy to shop at Aldi and other discounters.

This btw is my first comment - i've learnt a lot from your blog so please keep writing!

Anonymous said...

Long-time Tesco customer here, from Cambridge in the UK. Some random observations:

We use on-line grocery delivery these days. Customer service from delivery drivers and after-sales service is very good; they employ good people. Much better than you expect from wage slaves in-store.

They under-invest in IT. The web site is not as reliable as you expect these days, nor as well designed.

They have shot themselves in the foot with Clubcard. They have repeatedly changed the value of rewards (both in number of points per £ spent, and purchasing power per reward point). It is confusing, and this is supposed to make me loyal?

My 2p on the Tesco results is that it's mostly macro. UK retail suffered a massive supply shock in 2011 with commodity price rises and a 2.5% VAT rise. ONS data has nominal retail spending rising 4-5% yoy for virtually no change in sales volume. Set that against nominal wages going up at best 2-3%.

The Bank of England confused "high inflation" with "too much demand" (a la 2008) and it took them 10 months to notice we still have a demand problem.

Retailers had a choice between trying to pass through costs, or take a margin hit. Tesco have been flailing between pushing costs and compromising on quality. Some price inelastic consumers gave up and switched to Waitrose to maintain/improve quality (astounding revenue growth at Waitrose).

Some price elastic consumers traded down to the discounters, Aldi etc. Tesco are in the middle, and got screwed.

Andy said...

I think there is another factor not directly related to shelf prices or margins or supply chains. Tesco, as a business, is considered to be loud, brash and arrogant. It is the grocery equivalent of a bank. There are many reports, books and documentaries siting the 'aggressive' business tactics of Tesco. People equate Tesco with the same kind of approach that sees huge personal reward for senior executives at the expense of everyone else. There is a movement away from this, look at OWS. People are moving away from Tesco and taking their business, where possible and where comparably economic, to the underdog.

Kevin said...

@persistenttone

TSCO's RoA 2011 5.7% but given their gearing (primarily from current liabilities as a cash retailer, but also from some debt)Return on Equity 17.1%.

Not sure where you get "sub 5% return on equity" from

persistentone said...

Kevin, sorry you are right. I looked at Yahoo data, which is apparently complete wrong. I went to full financials on Reuters and those seem to show TTM ROE around 18%.

So I do see value getting them around book value. But I do wonder if there is any believable turnaround story in place to bolster that value looking forward. Today it looks like a deteriorating situation.

Alen Mattich said...

No one has mentioned Morrisons.

Asda and Lidl are hard to compete with at the low end of the market.

Waitrose (and Ocado in London) have the top end.

But the middle is being fought out between Sainsbury, Tesco and Morrisons. Morrisons, having been towards the low end, is I think more price competitive than Tesco and Sainsbury (though it's hard to tell). But they are also starting to poach more middle class customers with very good fresh fish and butchery as well as good deals on branded groceries.

I think they're the ones hitting Tesco particularly hard.

http://thosewhospeak.blogspot.com said...

I shop in Tesco occasionally but I much prefer Sainsburys and Morrisons. To my mind Sainsburys food is always way better quality in particular the meat. The packaging is also easier to understand (Tesco have their own silly nutritional data which differs from everybody else).

Morrisons is cheaper than Tesco and Sainsburys and is very good for fruit, veg and a wider vareity of meat (pig trotters!). Morrisons has really taken some good market share in recent years from Tesco and it is positioned somewhere between ASDA and Tesco.

So perhaps part of the problem is that Tesco is a jack of all trades. Not really the best quality (that goes to Waitrose and then Sainsburys) nor is it the cheapest (ASDA and then Morrisons).

Tesco expanded so rapdily during the past decade that they are seeing a backlash. My mother knows someone who works in their property department trying to get new sites for stores and Tesco get a lot of pushback from councils who want to encourage more local competition and fewer so called 'tesco towns'.

UK retailers have a sectoral issue in that margins are weakening due to soft consumer demand and a lot of their margin is from things like kitchen ware/ TVs etc so non food and then financial services (insurance/loans). With a tight margin an irrational price war is the real downside risk.

Finally Tesco advertising has got very dull lately with the same tired campaign of visual offers and random northern semi-celebrity voice overs. It all sounds very downmarket.

Jim said...

Long time Sainsbury customer here: A friend of mine who due to economic downturn has to watch the pennies like a hawk was very surprised how cheap Sainsburys had become. She shops at Asda and now Sainsburys, not Tesco.

My home town used to be just the usual Sainsburys/Tesco/Asda/Morrisons/Co-op - now it has 2 Aldi stores and 2 Lidl stores as well. My guess is that those two chains are taking more from Tesco than the others.

I reckon the Sainsburys Price Match promotion may have won them a lot of custom - you now know if something is on offer in another chain you can buy it in Sainsburys and get the difference refunded, admittedly in vouchers, but thats close to cash for most people. And of course once you have their voucher, you have to go back to spend it.............

Narg said...

I'm a French financial analyst based in Ireland and I personally own some Tesco stock.

I used to shop at Tesco but I was really put off by the quality and I once bought corn there that happened to be rotten (I put it in the bag without looking). That being said I thought that the rotten corn was a once-off and I thought that I disliked the quality because of my foreign taste and my favorite grocer is now Superquinn, which is in receivership, and if it is in receivership it means that my taste is not mainsteam (else it would be profitable!). So I just ignored my personal experience and invested in Tesco based on the numbers but in hindsight, and seeing all the other negative comments, I guess I shouldn't have.

I talked about it with a number of Irish people and Tesco does seem to have a reputation for high prices and bad quality - people who can avoid it, do.

Will said...

In many cases Tesco owns the customer- in my bit of London Tesco is my nearest supermarket where I can park and get in and out quickly. Similarly in my in laws town in scotland (pop about 10k), Tesco is the only game in town. Even if Asda is better value/ fresher its not worth an extra 15-20 mins each way of my time.
My take is that it is a Tesco mgmt balls up- they went on a massive price discounting campaign in the hope that people would spend more in Tesco, and people bought the same amount and spent less. The price elasiticity they hoped for didn't kick in.

Wilfried said...

@ Anonymus from Cambridge:
Quote: 'Some price elastic consumers traded down to the discounters, Aldi etc. Tesco are in the middle, and got screwed.' End Quote.

Great point. This also seems to be happening in the US and maybe everywhere. Here in Germany the crisis has not led to higher unemployment but wages have not risen by much for 10 years or so. Food and energy prices have, squeezing discretionary spending. Once shoppers looked for a certain price-quality relationship in goods they purchased. Nowadays the not-so-affluent focus almost entirely on price. And as they are becoming more numerous the middle segment of the market faces difficulties. Not a good place to invest.

David Morris said...

Based in Bristol (Englandland)

Can but agree with Blackraven, Riccardo & Jim. All competitors of Tesco (even C0-0P) have upped their games in the last couple of years. This combined with the departure of Leahey & consequent loss of his customer driven focus is going to mean a bumpy ride for in & out shareholders. Long term holders shouldn't be too concerned though, Tesco have too much nous to lose their way - I expect them to roar back through 2012-13.

Kind regards

Anonymous said...

Purely my own experience - the discounting seems to be concentrated on the chav-brands, they seem to have given up on middle-class shoppers.

They have a (very) few really brilliant Finest* products, but there seems to be a tendency to squeeze every last micron of margin by dropping quality rather than allowing buyers to build on quality.

*Naps - Plain naan bread, puff pastry, fresh pasta, claret, peanut butter....er, that's it.

Anonymous said...

Tesco have reached satuation point -here in Manchester I can go to 3 tescos within 1 mile radius -one superstore 1 reasonable size 1 express. The most recent offering has the best shopping experience as there appears to be more staff than customers!

JohnL said...

The most common narrative about the UK grocery market is that it is a series of local monopolies, and hence should be structurally profitable.

I can see the logic of that, but the market has never really behaved that way. The UK grocery market has always behaved like a horribly competitive, price sensitive market, while little structural competitive advantage:
1.If you get the price/quality mix right, you gain market share, if you get it wrong you lose it. 2.Everyone except the market leader struggles to earn acceptable returns. Bankruptcies are possible (safeway, quicksave, iceland)
3. Margins and return on capital are not that high, even for the market leader.

Also its horribly asset intensive. I don't think Tesco has ever generated any cash, it all goes into building new stores.

If anything the price competition has got worse. Sainsbury actually compares your bill to what you would have spent at other supermarkets (on branded goods) and give you difference back (in vouchers). This happens at the till, automatically, without you asking. Morrison's allow you to put your receipt into their website, and you get twice the money back.

Tesco was simply much better run that the other players; this isn't so true any more.

Anonymous said...

There's a Tesco, Morrisons, Waitrose and Sainsbury's in my town. The Tesco's is bar far the most tired store, it's got quite tatty. The other three have all had refreshes over the last 18 months. There's another larger Tesco 10 miles away and that's the same. They have let their stores get quite tatty whilst all their competitors have refreshed.

obelix said...

Yet another reason for the stock selling off may be the following. Europe is a lot less scary place now that it was three months ago. Because of this, many investors may be looking for excuses to sell their defensives and by some cyclicals and banks, while few people are looking to buy defensives. (Does this mean that defensives are a buy? No, if the process is just starting.)

Anonymous said...

The Tesco Metro in Salisbury has a roof that leaks over the food. Its been like that for ages. They just put one of those 'Warning' signs near it and leave. In heavy rain the water goes all over shelf and contents. Nuts. Morrisons is much much better value and quality.

Panly said...

Looks like the timing is right for an investment in Tesco.

One never knows where the bottom is, but I guess we are nearer to the bottom than near the top,
at 10x Earnings, +4% dividend, some real assets and not too much debt.

And on top of that, mum, dad and the uncles around here are shouting "sell, sell, sell".

Anonymous said...

Next time you are in the City of London, step our 4 miles to the big local Tesco in Bromley-by-Bow. It's enough of a "local" non-London experience. Tatty & dirty, with fruit & veg that is of far lower quality than rivals offer, for a price saving that is too small vs the speed at which you have to eat the fruit before it has gone off...

Anonymous said...

I don't need to do the freshness test - I already know the answer. If I buy fruit or veg from Tesco it will have rotted within the week. I mostly don't shop there for that very reason - Sainsbury has better quality, and Waitrose better still. Occasionally Tesco sends me so many vouchers that it'd be churlish not to shop there, but every time I do, they are a disappointment.

As to UK supermarkets more generally (outside London), I was amazed to be able to shop in comfort at Sainsbury several times in the week before Christmas, with no queues. Never used to be that way.

Anonymous said...

I used to shop at Tesco but have switched away. Key general reasons being.

1) Long supply chains (non UK sourced for cheapness) especially for meat so that shelf life is short.Most UK shoppers use the supermarket once a week so you don't want to be checking the date on everything to make sure it will last the week and I won't buy anything that looks a bit off despite what shelf dates say.
2) Low staffing numbers causing long checkout delays, poor advice, late removal of short shelf life stock, poor cleaning.
3) Some outlets too small, with the storage area too small so that there are periods of the day when shelfs are empty. Any savings get wiped out if you need to make numerous trips to get what you need.
4) Some outlets too big, with it taking too long to walk round and complete your shop.
5) Fridge units not always operating at the correct temperatures, with a risk of poor shelf lives and other risks.
6) Badly organised parking facilities so it becomes difficult to get in and out, difficult to get trolleys to vehicles, narrow spaces so you risk denting car doors.
7) Value brands having inconsitent quality, so its a bit trial and error whether you want to save money by buying them.
8) Poorly organised shop layouts, or layouts which guide you into areas you don't really want to buy goods, especially if you nipped in for one item.
9) Occasionally you might require something extravagant or unusual and the chances are Tesco might not stock it.
10) Cut price deals which focus on shifting poor moving stock, rather than customer bargains. There is usually a reason stock is slow moving off the shelf, so you don't always realise the saving in the long run.
11) Last but not least, we are getting smarter to the ways supermarkets operate and hide real bargains, promote bargains which are not when you really look at weights/volumes and prices.

Not that the competition is much better but having bought groceries I cannot afford to throw it away and time and convenience is important. The balance of service, quality and price is not right and investment in the UK has been behind other market players.

yoyodynet said...

Panly - just because everyone tells you it's raining is no reason not to take an umbrella.

Skeptic said...

As per usual, a stock price drop has brought out the "business is doomed" commentary. My thoughts are as follows:
- I’m a bit puzzled that a 1.3% decline in UK LFL is such a massive surprise, talk about precision in forecasting and the burden of high expectations.
- The supermarket business globally is fiercely competitive and the UK is no different. Tesco’s market position is still very strong (especially given space economics in the UK) and a bad quarter doesn’t make it a bad business or fundamentally change the medium term economics. None of the problems described above are terminal, and the management team are competent and fiercely competitive.
- The balance sheet, while not perfect, is still robust. They can finance themselves cheaper than most businesses can dream off, that is a significant advantage in today’s world. A number of their competitors are not paying self-financing dividends.
- Valuation is very reasonable at current levels …and getting more reasonable.
- The usual urge to stick with the consensus amongst the sell-side and buy-side community is stronger than ever in the current environment and there a strong equity technical in the sell-off. No one wants to “catch a falling knife” in the current environment and everyone is in job preservation mode. If your capital is patient you can probably afford to be a little contrarian. Looks like complete capitulation.
- Your fruit and Veg comment is interesting…but at the risk of being facetious this is still a UK supermarket – nappies, crisps and larger are much more important. The ability of Tesco to take its pound of flesh from their suppliers is impressive (I’m sure you know this already). I suspect this is the driver of perceived or actual differences in fruit quality above, incremental margins exist for a reason.
- Long queues are a positive sign to me.. customers are always nice when investing in a business.
- Christmas is a time when even the most price sensitive become a little less so. I find hard to reach for my wallet at the best of times but it does manage to creak open at Christmas.
- The commentators on this blog are highly unlikely to have ever been Tesco’s core customer base, so it’s easy to be negative. Finance blogs don’t tend to attract the most price sensitive consumer (even if we like to fool ourselves occasionally)- perhaps a different sample would give you a better picture?

My two cents for what it is worth.

Rzilla said...

A lot of talk here about Tesco losing out on price to other stores....so why did M&S do so well over xmas? Last time i checked they werent a discount store by any means!

Anonymous said...

The best explanation yet for the profit warning...

Tesco slump due to divine intervention, says Christian pressure group

http://www.guardian.co.uk/business/2012/jan/13/tesco-slump-divine-intervention-christian-group?newsfeed=true

Robert in Chicago said...

yoyodynet said...
Panly - just because everyone tells you it's raining is no reason not to take an umbrella.

The problem with your analogy is that it has no price component. Either the umbrella's cost or the amount you get paid for getting wet just shot higher -- the real issue is whether it is now high enough. I think the answer to that question depends overwhelmingly on one's investing time frame.

Anonymous said...

The local Tesco is old, not particularly dirty but the floor has not been replaced for years, the so called offers are a joke - half price wine that you would barely pay its halved price for in a right mind, a horrible mezzanine, a car park involving a long walk and risk of being run over - oh and the aisles are so narrow and clogged with their internal internet shoppers - to be avoided - oh and they have forgotten they are principally a food retailer and more and more shelf space is given over to other things - oh and Lidl is just down the road with seriously competitive prices and quality. But then one has to remember lots of people fo shop there and Tesco is now an international firm - just Carrefour's international travails come to mind and Walmart have never been totally successful with Asda

Gordon said...

I have been wondering for some years how long Tesco could sustain its winning run. I suspect major reasons for the decline are:

1) Change at the top. New CEO was on TV news the other night saying, sort of, all the right words but his body language was lost and bewildered. Apparently a bunch of key lieutenants also left recently. Succession is a bitch.

2) Imperial overreach. Too many stores, too many countries, too many businesses, too arrogant, too many enemies. Key lieutenants leaving would greatly compound the difficulty of managing the empire. Their trashing of towns for profit is legendary. Ditto suppliers. We stopped shopping there several years ago.

3) Others catching up and pinching from top and bottom. Tesco is stranded in the middle.

4) Tricky pricing. Not unique to Tesco but something that people seem belatedly to be catching onto. It was what random interviewee on on a news vox pop mostly mentioned the other night.

For more comments follow this link.

http://hat4uk.wordpress.com/2012/01/13/tesco-tricks-update/

Anonymous said...

I am in the US, so my firsthand experience of Tesco is limited to Fresh & Easy. I'm not sure whether you're looking for input on Fresh & Easy, but will give you my thoughts in case you are.

Fresh & Easy is the closest grocer to my home. That is the only reason I shop there at all; my purchases from them are limited to occasions where I need to run out and get one or two things. If the list is any longer, I go the little bit further to a competitor.

Selection is quite limited, prices are competitive (but no more than that -- their prices any not noticeably different from other nearby grocers), and the shopping experience is mediocre.

If I lived half a mile east of where I do, it is safe to say I would not shop at Fresh & Easy at all.

Here is a recent Los Angeles Times piece on Tesco's struggles in the western US: http://articles.latimes.com/2012/jan/11/business/la-fi-fresh-and-easy-20120111

persistentone said...

@Panly, you are not reading these comments critically. People are not saying sell, sell, sell. Customers of the product are telling you that the competition is getting fiercer and Tesco isn't responding.

I agree if the return on equity is >15% and they are near book and can sustain a 4% dividend that it would be nearer a bottom than a top. But you can't make an investment on those numbers unless you have some concrete knowledge that the business fundamentals will sustain the dividend and the return on equity. Based on what others are saying, it won't surprise me to see this slump in business results get worse before it gets better.

Anonymous said...

I can walk to all the different main supermarkets except Morrisons and the Tesco fresh fruit and veg is much better than Sainsburys and more or less as good as (and sometimes a third cheaper than) Waitrose and M&S.

I'm not surprised they're not making much money.

Anonymous said...

Sadly, even Finbar Taggit has weighed in:

http://www.fintag.com/2012/01/tesco-analysts-asleep-at-wheel.html

Hopper said...

Echoing many of the comments here: experience with Sainsburys, Tesco, Morrisons, Asda across the Midlands:
1. I end up doing the bulk of my shopping at Sainsburys as the price point / freshness / brands / atmosphere combination is optimal
2. Asda/Walmart megastores are available wherever Tesco megastores are, and have significantly better range/value
3. I'd spend money at Sainsburys or Asda cafes if I'm there for a big shop; Tesco or Morrisons, no way
4. I do spend some money at Tesco Express if it's close, but am keenly aware of generally inflated prices so purchases are small.
5. Tesco megastore technology product areas suck beyond the telling.

Essentially, Tesco are in the middle of a very competitive market and have Sainsburys eating their richer/weekly shop customers and Asda/Morrisons taking bulk shopping.
Tesco express seems to be the only bright spot from where I'm sitting.

Mars said...

Steve Johnson:
"Coles' new owners will be perfectly happy with a 4% margin, 5% would be a disaster for Woolies."

For dummies like me, why a disaster for Woolies at 5% ? Are you implying that any growth in Coles' margins will come from increased revenue per store (rather than cost control) and hence will imply taking market share from Woolies?

Mars said...

Skeptic (January 14, 2012 3:34 AM):
Good to see someone off the bandwagon.

strowger said...

I live in the North of England, hold Tesco shares, and sometimes shop there. I'm male and I do 90% of the shopping for our family.

It's very trendy in the UK at the moment to bash Tesco. The media coverage has been unremittingly negative for several years now, on all sorts of issues which Google will tell you about. Any mention of Tesco brings out negative comments and doom-sayers, and therefore the collection of negative comments you've gathered should be taken with a pinch of salt.

I am particularly sceptical of comments which suggest that Tesco's individual stores are worse-managed than the competition. That's exactly at odds with my experience as a customer, which is that generally but not always Tesco stores are better managed than the competition. When it comes to basic operational stuff like items being out of stock, long queues at the checkouts, spoiled goods on the shelves - Tesco have a better handle on this than Sainsburys, Morrisons, and Asda.

Tesco's home delivery service is a class act and is well-run. They've put a lot of effort into it, and it shows.

That said....

Quality is a big problem. It's clear to me as a customer that Tesco have maintained their margin by cutting back on quality. A side-by-side comparison of processed food & drink items between Tesco and their competition generally shows similar prices, but poorer quality from Tesco. This is going to take quite a lot of money to fix; it's built up over several years.

They're failing badly to manage the media - they need new PR - their name is mud among the newspaper-reading and BBC-watching UK public.

Clubcard system is being mis-managed. As other commenters noted, it's changed too many times, and the promotions are no longer interesting. "£20 off £50 of shopping" type offers are gone, in favour of "save 5p off this £3 item that you don't normally buy" type offers.

I agree with the general perception of Tesco not being "good value" any more, and I agree that it's going to be extremely challenging for them to maintain margins. That strong balance sheet is going to be important.

Mars said...

Strowger: If you want a few lessons on fever pitch hysterical commentary, than look not further than 'down under' for commentary on Harvey Norman!

Anonymous said...

I'm baffled by some comments like the last one ("comparison of processed food & drink items between Tesco and their competition generally shows similar prices, but poorer quality from Tesco").

The UK seems to have very little supplier diversity, and comparing ingredient lists on e.g. biscuits between Waitrose, Sainsbury's & Tesco shows many, many items coming from the same factory. I notice the same trend on many bulk items. Tesco is rarely the low cost option, unless they have a sale. The way they arbitrarily change up quantities and price in their sales may confuse the innumerate, but probably doesn't win too much business.

That said, outside West London I'd not shop at a Tesco by choice, and inside West London I don't know any price-insensitive people who go there, even when there's a Tesco Metro metres from a Waitrose. Sainsbury's has a wider and more interesting selection at similar or lower prices, and Waitrose a more pleasant experience and better quality.

Travel_the_World said...

I think that Tesco has gone a bit downhill over the last couple of years while its competitors have become better. A lot of it is trying to be all things to all people; competing with discounters and luxury supermarkets, catalogue stores and cheap clothing in non food; they end up being mediocre at everything. There has also been too much smoke and mirrors lately, doubling of prices so that they can halve them a bit later and claim that they are cheap.
They also had a big screwup with Tesco Bank in mid 2011 that was a classic of complacent management, they were in complete denial that there was any problem while their customers were going to the media because they could not get through to Tesco online or by phone or get their money. All when they put in a new software without adequate testing, could not even print bank statements and it took 5 months to deliver a fix.

Frozen in the North said...

Last year my shower head broke, I called the plumber, he wanted to charge me $700 (basically plug in system), he suggested I call his supplier, he wanted to charge me $500 (plus taxes), but I had to go there in person, they would not take my credit card number on the phone. Moreover, delivery would be 6-9 weeks (not in stock). So I checked on the web, and I found an American internet supplier -- his price delivered $199 (to my door) in 7 business day!

The plumber was honest, the middle man was a crook, and will eventually go out of business. The internet is reshaping the client supplier relationship, from grocery store to plumbing supplies.

Ferry van Asperen said...

I spent two weeks back packing with my significant other through East-Cumbria and the Scottish Highlands last summer. We've bought groceries at M&S, Morrisons, Aldi, Lidl, Tesco and Sainsbury's. We only bought fresh foods, as we could only carry so much and carrying alot of cans around only adds weight.

The fresh food department was the best at M&S. It had the greatest quality and the greatest variety of products. M&S tend to be in larger towns only though, and in the city centers to boot. Tesco seemed to have a monopoly with their Express stores in smaller towns. We avoided those whenever we could however. The stores were ugly, finished with rectangular tiles like a wet room and with bright TL lighting. They did not carry much fresh products and the ones they did carry were high in price, but poor in quality.

We would visit Morrisons whenever we could. Their fresh food courts were the best after M&S. We also liked the restaurants at Morrisons. We waited out many a rainstorm in one of those restaurants. A plate of hot food and a dessert only costs a few quid and this seemed to attract a lot of other shoppers too.

Tesco has a great base with their Express and Metro stores. Those stores are designed to maximize the revenue per square foot by carrying mostly high margin items. Their real estate is on great locations and they have a monopoly in many small towns. The problem with Tesco is that their investments away from that base are rather poor, which is indicated by their decreasing margins.

farmland investment said...

I am an avid reader of the Daily Telegraph, although not UK based. Here is an article from DT on Tesco - http://www.telegraph.co.uk/finance/markets/questor/9010879/Questor-share-tip-After-Tescos-plunging-food-prices-come-the-shares....html. 16% drop in one day. In general, I think retail companies get into trouble when they venture outside their core geographic areas anyway. JK

"Cassandra" said...

John,

I think "Skeptic" nailed it best. An expectational-growth torpedo hardly qualifies for the hand-wringing surrounding TSCO. No business is without its warts and blemishes, but TSCO is reasonably solid, well placed and generating quite attractive returns without undue leverage - I frankly do not see the problem (here), though I understand the valuation pain of transiting from a higher rating with more expected growth to one more muted in both respects. The reality of challenging growth (even and periodic contraction) is likely in the price on longer-frame horizons, and that's what matters. I do not see it as a Carrefour situation.

By qualitative comparison, I prefer my local TSCO (admittedly in one of the wealthiest areas of Kent) to my local Carrefour or Casino (in one of France's most well-heeled areas) by a long way. The French can learn much about retailing from the Brits, just as the Brits have a lot to learn about Quality of Life from the French.

Surprisingly not one commetator mentioned "Cash Back" (Waitrose & M&S & Morrisons), which I believe some retailers are using to goose otherwise flagging sales. I suspect they are cynically including the dispensing of convenience cash in their aggregate turnover figures diminishes margins but buffets sales. If I am right about that, it is a desperate move, and an accident waiting to happen in shares of the those who've yet to come clean.

gadget said...

I'm a londoner and shop at tescos, have no problem with them. But this guardian article may be onto something:

http://www.guardian.co.uk/business/2012/jan/15/tesco-growth-megastores

Tescos have been cutting back on their staffing and store maintenance to keep the numbers looking good. This works great in the short term but is now coming back to bite them.

Adam said...

I lived in Cardiff for a few years (and many friends still do) while my parents are in the south Wales valleys.

Most of us have generally always shopped at Tescos though a few have changed over the last year.

First up was home delivery. Most of my friends moved to this a few years ago and at first Tesco were the only ones with a really good home delivery service. That has changed recently which meant those who were only using Tescos for the home delivery were able to move back to whatever their previous preferred supermarket was.

For some surreal reason they also introduced parking clampers for their carparks (or at least the one by my parents did). Within a relatively short period of time they managed to piss off quite a lot of people who then boycotted the place and started using the local Asda instead.

The other supermarkets have expanded significantly. 2 years ago there was only a Tesco superstore and Tesco Express within walking distance of my house (Greenwich, south London). Now I also have an Asda, Sainsburys and Co-Op. There's bound to be some drop off from this.

As a couple of other people have commentated, they seem to be chasing the poorer shopper a lot more than they used to. I loved their range of finest products but a lot of the stuff I used to buy is no longer available and has no suitable replacement. With Waitrose and Marks expanding quite a bit as well I know quite a few people who while still doing most shopping in in Tesco now buy a lot more one off meals in these other places. http://www.marksandspencer.com/Dine-In-Offers-In-Store-MS-Foodhall-Food-Wine/b/198933031 was/is an especially successful campaign.

They also seem to be pushing their own brands a lot more. Quite often when going through my favourites I find an item is listed as unavilabile and the recommended product is one of theirs. Generally they come back by my next shop 3 weeks later but not always.

Unlike one of your other commentators though I've never had any issue with the website and find it quite easy to use. The fact it automatically adds any item I buy in store to my favourites list so I can find it easily again is fantastic, and the way it lists all the offers that you haven't qualified for so that you can take advantage of them if you didn't realise there was one at first.

I realise in general this sounds pretty negative on Tesco but most people I know still do the overwhelming majority of their shopping there and like it. The food is still a good quality, the self service tills are the best of any supermarket and their pricing and food range is overall very good.

Admin said...

I'm a Brit. I've lived in the UK again for the last six months and I've been moving around a lot - I've moved about ten, eleven times, mainly around central London, so I've seen a lot of supermarkets recently.

My preference is for Waitrose and M&S, since they have the highest quality food. Often, however, I've not been within walking distance of those chains and it's been Sainsburys or Tescos - in particular, for one month, a large 24 hour Tesco.

(One thing I learned, moving around a lot; if you want to know the quality of an area, search on Google maps for "supermarkets". If it's all Cost Cutter and Tesco, it's poor. Where you find M&S and Waitrose, it's wealthy).

I don't like Tesco. It's the lowest quality supermaket I'll shop at; Sainsburys comes next (moderately better) and then there's a big jump to M&S and Waitrose, both of whom are superb.

I've not been in an Asda, so I can't say what they're like.

My problem with Tesco is quality. There was a time (some years ago) where they were dropping price but you still bought good products. Now, the price may or may not be good (I earn enough I'm insensitive to food prices) but the quality has dropped, to the point where I don't like their product.

This is something I particularly notice with fresh fruit. I won't, for example, even *buy* blueberries in Tesco and Sainsburys because it's a waste of money - you always or almost always throw away what you've bought, because it's so unpleasent to eat.

Of course, many brands are standard and non-Tesco so it's still *useful* to shop there - you can get your pasta sauces and pasta and lots of stuff - but you need to go somewhere else as well, and if you can get everything you need there (typically you can), why go to Tesco?

So, in summary; it used to be just the price tha dropped. Now quality has dropped too, which means that they are no longer a supermarket selling the product I look for.

dearieme said...

We've found ourselves shopping more at Sainsbury's recently, one reason being their clever use of vouchers mentioned above.

But it's worth asking why Tesco is being outwitted by the competition in the various ways people have suggested. Tesco has a reputation of being an unusually lousy company to work for: the management treat the staff poorly, behave ruthlessly toward each other, and often treat customers with contempt. Such behaviour makes it very difficult for accurate data and bright ideas to float up through the heirarchy; it also makes it difficult to attract or retain bright young managers or willing staff. Presumably this is Leahy's doing, but whoever's doing it is, it's a bloody silly way to run a company.

Anonymous said...

Tesco Club Card points and how they are carried on the balance sheet is highly problematic for me. Tesco coudl be a basket case.

Staffing services said...

kiedI do not recognise the police force I joined over 20 years ago. You are right about the overtime; there was a constant resending of emails offering the same double time, because very few were interested in dealing with violent, drunked, drugged up scrotes with little or no backup due to the reduced staffing levels on bank holidays.ealimpr

t said...

I've just been through the conference call transcript. Management talked quite a bit about service. An anecdote to illustrate:

On Sunday I went to my local Tesco’s to buy crumpets. I had a look in the bread section and couldn’t find them so asked a passing Tesco’s employee. The response was “They’re there somewhere” as said employee wandered off. Not dissimilar to my search for cream a week previously: “It’s in the far corner of the store.” It wasn’t. In the past, I’ve asked Tesco staff whether they stock a particular product, and they’ve said no only for me to find it after a bit more looking. Tesco staff are almost uniformly awful, or rather, they haven’t been told that customer service is part of their job.

The standard response is Waitrose is that they take you to the item, then ask you if there’s anything else you need. I don’t know what the relative wages are, and how partnership bonuses work for junior JLP staff, but Waitrose staff are considerably superior to Tesco’s staff.

The standard response in Sainsbury’s is to take you to the item. The last time I went, however, I got the full ‘Waitrose’ treatment. Unsure whether this was a one-off, or Sainsbury’s is working harder on service.

Any ideas on how easy it is to train staff? I suspect that a good proportion of the current Tesco’s workforce is untrainable.

Anonymous said...

I'm one stop away from Liverpool St., so apologies in advance not a out of town reference. But one stop eastwards might as well be out of town entirely, such is the difference between Tesco stores. Gone are the higher end ready meals, in is piled high in your face bulk discounts which aren't. Also in is aggressive rotation of shelf positioning (which I understand is not necessarily controlled by Tesco themselves)and most certainly omnipresent is customer weariness. It is a real chore to find the same products in any given consecutive weeks. People tire of that. Even if the prices are okay, and not so sure about that, it creates mistrust, if only out of the extra chore shopping becomes. Several shops run by local Turkish guys beat them hands down on freshness and price. Right opposite. If you have to visit multiple stores just to find both Marmite and your usual cereal (not entirely an exaggeration) it drives footfall away. They are doing it wrong, in a recession. Maybe they bought into their "we play it straight" marketing. In a big apartment building, accommodating maybe 300 mostly young professionals, I absolutely never see a Tescos bag. Sainsbury's, yes (the okay Sainsbury's is much further, though there is a "local" little one). Local no brand stores, yes, even the terrible chain "convenience store" plenty of shopping bags. So it's not everyone eating out, which would be likely above my take on household incomes.

Anonymous said...

Tesco suffers from three problems, all of them hard to fix without a negative impact on the share price.

First, it is huge. If someone wants to express discontent about out-of-town retailers messing up local high street businesses, or about the bad deal farmers get from supermarkets, then Tesco is their target. Any regulatory change to planning rules, to promote the high street vs. out of town shopping, or to support UK agriculture are negative for Tesco.

Check out http://www.tescopoly.org for a sense of the strength of feeling.

Second, people hate the Tesco experience. It isn't nice, like Waitrose, or really cheap, like Asda. It's in the middle ground, and that is being squeezed. Sainsbury's isn't much more expensive, but it feels higher quality. The Co-op manages to feel less like a huge retail conglomerate.

Third, Tesco's international expansion has definitely had mixed success in the past, and there is little evidence it will be better managed going forward.

I have no position but if you forced me to pick long or short, I'd go short.

Stan Li said...

Despite being a strong proponent of TESCO in the last few years, it seems this year has gone downhill for them. I've been shopping in the last 4 years with them switching from Sainsbury's but I'm now switching back to Sainsbury's and might consider ASDA.

Just some general observations in the last few weeks:

1. Meat is more expensive in Tesco than Sainsbury's or even ASDA. Everyone seems to have this 3 for 10 quid deal, but Sainsbury's included the at least 1 out of 3 from their Taste the Difference range. ASDA while it can't compare, it managed to offer reasonably priced easy-to-coook meat i.e. boneless chicken for less than 4 quid.

2. Vegetable selections are too cluttered and they are less fresh to me than it used to be. ASDA surprisingly has very good value vegetables and fruits.

3. My forgetful wife always forgets to bring her Clubcard and when we used to get deals for discounts at the petrol kiosk from Tesco, these deals seems non-existent anymore. In ASDA there is no need to bring discount cards due to their offers of everyday low prices similar to the ones in Walmart.

4. Half of my local Tesco is now filled with junk food and booze! I guess perhaps the demographics of my area has changed.

5. I am surprised to see real Asian imported brands in ASDA as compared to imported in bulk and repackaged items in Tesco & Sainsbury's.

6. Tesco seems to have forgotten about the bored partners who go shopping with their wives and we usually hang out at the DVD/Blu-Ray/Games or Electronics corner. My last trip there on a mission to buy a TV resulted in disappointment with poorly trained staff who even dared to sell me overpriced HDMI cables.

Conclusion is that while Tesco managed to gain customers in the lower middle-class group in recent years, it seems they are alienating them very quickly this year.

BlackRaven said...

what is the best format for apple test results?

mlatem said...

The UK problems will eventually be sorted out. Walmart in US had its few stumbles few years ago.

What most of you are missing is the fact that, Tesco's international business will be as big as its UK business (as of today) in 10 years and growing at double digits (15%).

So the company is returning 5% as dividend and can continue to grow in Asia/LatAm/Europe/Africa/USA for another 30 or so years. You can buy it today at a PE of 10. Warren Buffett is looking years out so should any investor buying this stock today.

Professor Professorson said...

I have a few comments about Tesco generally.

First, I disagree with the comments about the departure of the former CEO Leahy being part of the problem - he was responsible for jacking up margins in the UK in 2008-9, which is what is now hurting the group's UK revenue growth. He went out with a blaze of unsustainable profits before he retired to make himself look like a hero and left the new guy to clear up the mess.

The reason for the profit warning was because for the last three years Tesco has run a 6.2% operating margin in the UK compared to 5.8% in its international stores (a result of Leahy's strategy).

This has created uncompetitive pricing for consumers and under-investment in the 'shopping experience' - hence the tatty stores, lack of freshness and lagging revenue.

The new CEO said in his profit warning that the operating margin needs to be reduced and more investment needs to be put into stores (most of you on here seem to agree!).

However, the UK is still growing in terms of total revenue and revenue growth is a more important factor in Tesco's profitability than margins over the longer term. Also, it has growing businesses in Asia and Europe (as well as the UK bank) which can pick up the slack while investment is put into UK retail.

There may be some lessons from Tesco for investors in Woolworths and Coles.

I haven't looked at the financials of Woolworths or Coles, but Woolworths reminds me of at Tesco Mark II. It does not surprise me Woolworths has better margins - look at the stores. They are the equivalent of Tesco's in the UK, tatty, with a relatively shabby brand.

Even as a shopper you can see Coles invests more in its stores and in its brand. How long before customers dessert Woolies in favour of Coles or the Aldi stores you increasingly see in Oz?

BlackRaven said...

From the apple tests we did, there were some clear results, although the data was pretty mixed across the country.

Waitrose consistently came last with their apples lasting less than a week. Tesco was right in the middle with Sainsbury and Asda, with the winners being Morrison and M&S.

I was a bit surprised by the winners. Although most of the comments have waxed lyrical about Waitrose, their fresh produce has always gone off quickly in my experience. From the other comments you would think that Tesco is doomed, it still has 30% market share so I think there is a bit of sample bias going on.

What is interesting is that they are reshuffling their UK marketing. Bradley who was responsible for the big price drop is moving. I think it was a terrible campaign with no retail flair. A 3 for £10 deal is attractive, whereas purchasing a packet of tomatoes for 80p instead of 95p might be a big percentage change, and might cost the store a lot over a lot of products, it is not enticing and easily noticeable. Which I thought would be the point of a marketing campaign.

John Stewart said...

To hold 30% of an FMCG market takes some doing, in the case of Tesco it will fall, it is under too much pressure

1 Management will not cope with the diversity of Markets

2. Within the UK there is an over shopped situation
developing in favour of the competition, in particular
Sainsbury Waitrose Aldi Lidl. In the former the basic
experience in meat and dairy products shows day by
Day, and the pricing ability in Aldi and Lidl with limited
ranges are making in roads.

3. Tesco has too many large stores, and quite a hefty
Land Bank, it has used its cash flow to build a
Juggernaut, and may be well be able to revive their
Fortunes, but it will be a much slower job than
than WB expected, and with the current surprises
not the end of the story. It may not quite be a
Conglomerate but has some similarities and need
of a clear headed decisive leader.

4. Shares will wobble about, but likely to get down to
280P mark, or less if the dividend does not hold.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.