What’s Going On Here?Tesco, the UK’s biggest supermarket, reported on Wednesday that its profit fell in the first half of the year. What Does This Mean?There’s a high-stakes game of limbo taking place in the UK right now, and it can be witnessed on every high street in the country. The contenders are Britain’s flock of supermarkets – only one of which can take first prize and win the hearts (and wallets) of the nation’s hard-up households. Tesco, for its part, has redoubled efforts to keep bargain-hunting customers from defecting to rivals, with a fresh price-freezing and price-matching bonanza. And with sales growth actually beating expectations, the numbers suggest the strategy has been pretty effective. But the sword that slashes prices is double-edged, and what it adds in sales, it cuts from the bottom line. No surprise, then, that operating profit fell by 10% in the period, with Tesco confirming profit for the full year will be at the lower end of its forecasted range. Why Should I Care?The bigger picture: The throne’s secure for now.
It makes sense to take the threat posed by discount rivals seriously – after all, Aldi became the country’s fourth-biggest supermarket group just last month, with a 9.3% market share (overtaking Morrisons, which had sat in fourth spot since 2004). But it’s worth remembering that Aldi’s not on the level of Tesco just yet, whose formidable 26.9% share of the market and more than 3,000 stores overshadow Aldi’s single-digit portion and 970 shops.
Zooming out: Every little hurts.
The weak pound could pose a real threat to British supermarkets’ profits in the coming months. See, although the government’s U-turn on some tax cuts triggered a 10% rebound in the currency this week, many strategists think the reprieve will be short-lived. In fact, if the economy keeps stumbling the way it has been, analysts think the currency could hit a new record low by the end of the year. | 