Tesco is to cut prices and modernise more of it stores to try to turnaround flagging sales in the UK.
Philip Clarke, chief executive, will tell investors at a presentation on Tuesday that price cuts and store revamps are needed to improve Tesco’s performance in the UK despite unveiling a £1bn turnaround plan two years ago.
The Tesco boss is likely to warn that Britain’s biggest retailer is to sacrifice its industry-leading profit margin of 5.2pc to try to boost sales. Tesco will instead operate without a stated target for margins so the retailer can move with customers and operate without a “strait-jacket”.
Last month Tesco warned that like-for-like sales declined by 2.4pc in the UK during the busy Christmas period despite significant investment in its own-brand food ranges and an overhaul of its hypermarkets that has seen Giraffe restaurants and Harris+Hoole coffee shops installed.
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The company is underperforming its closest rivals Asda and Sainsbury’s, but is also losing market share to the discounters Aldi and Lidl.
At a presentation in the City, Mr Clarke is expected to say that the Tesco intends to cut the price of key food items and focus on being “sharper” with its pricing rather than running a wave of promotions, which customers can find confusing.
John Kershaw, analyst at Exane BNP Paribas, said Tesco needed to make its pricing “more trustworthy”.
He added: “One thing on which investors should be very clear, making UK mainstream grocery retailing ‘fit for the 21st century’ is not about directly competing on price with the discounters.
“It is about fair, honest pricing, a differentiated offer and making customers’ lives easier. Price is very important, but is but one aspect of the customer proposition in a world where less than 10pc of household income is spent on ‘sustenance’.”
Mr Clarke will also accelerate Tesco’s programme of store refurbishments, which includes putting salad bars and more fresh food into its convenience stores as well as revamping Tesco Extra hypermarkets.
Tesco’s plans are likely to cost hundreds of millions of pound, with part of the cost offset by an efficiency drive.
Bruno Monteyne, analyst at Bernstein and a critic of Tesco, said: “It is definitely a profit-reset, but as the company has guided down investor expectations well ahead, it is hardly a profit warning.”
He added: “Tesco has failed to adapt to the change in competition from space race to distinct-offer competition.
“By raising prices faster than anybody else, Tesco has lost its differentiation, giving a free ride to the targeted retailers at both ends of the spectrum – value & quality.
“The current strategy is vague and does not address the problems of a lack of differentiation, and internationally it remains overly centralised.
“Concerns about the quality of the earnings and accounting principles pose a risk of further write-downs or profit resets.”
Date: 27 February 2014