Tesco Plc (TSCO), the troubled U.K. grocery leader, needs to spend more than 3 billion pounds ($4.9 billion) to turn around its fortunes, including slashing prices and improving food quality, HSBC Securities estimates.
The retailer has been “going wrong” for more than six years and requires a “significant re-engineering” that would include adding workers in under-staffed stores, according to HSBC analyst Dave McCarthy. To compete effectively with a tide of discount competition, Tesco needs to cut prices by 5 percent to 6 percent, he says.
“We think Tesco needs to do better in very many areas,” McCarthy wrote. “There are no short-term solutions, shortcuts or cheap solutions. Tesco has disappointed the U.K. consumer for too long and it must rebuild trust, which can only be done by giving the consumer a better deal.” A turnaround could take more than five years, he estimates.
New Chief Executive Officer Dave Lewis is due to unveil the grocer’s delayed first-half earnings later this week, along with an update on a probe into an overstated profit estimate. Tesco’s sales and market share continue to slide as discounters Aldi and Lidl and Wal-Mart Stores Inc.’s Asda gain, though the pace of decline slowed in the last month, a report from researcherKantar Worldpanel showed today.
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The shares advanced 3.7 percent to 185.9 pence in London, the steepest gain since Sept. 6, 2011, after last week falling to the lowest in about 11 years.
“This is Tesco’s best month relative to the Big 4 since January,” Niamh McSherry, an analyst at Deutsche Bank AG, said in a note, while cautioning against relying on a brief period to determine a change in trend.
The grocer’s U.K. sales declined 3.6 percent in the 12 weeks ended Oct. 12, the least since June, Kantar Worldpanel said. Its domestic market share fell to 28.8 percent from 30.1 percent a year earlier, according to the researcher.
“Tesco is yet to see substantial improvement, however it seems it may be turning a corner,” Fraser McKevitt, head of retail and consumer insight at Kantar, said in a statement.
The extent of price cuts recommended by McCarthy would cost Tesco 1.6 billion pounds to 1.9 billion pounds, he wrote. Such a reduction would “open up a meaningful gap” with competitor J Sainsbury Plc (SBRY) and put Tesco “within touching distance on price to Asda,” McCarthy said.
The analyst also suggests increasing store staffing by about 20 percent to boost service levels, which he estimates would cost 532 million pounds. As much as 1 billion pounds needs to be spent on improving food quality, which has been declining relative to the competition, he said.
To fund investment, Tesco could cut 1 billion pounds from its 12 billion-pound cost base by reducing head office staff, ceasing to operate a fleet of corporate jets and eliminating some store roles, according to McCarthy. The grocer also has scope to stomach reduced profitabilityas a result of price cuts, and could lower interest costs through a rights offering of new shares or a similar form of financing, he said.
Date: October 21, 2014