Professor Gary Cook is Head of Economics, Finance and Accounting at the University of Liverpool’s Management School
“On 17 April Tesco announced its first fall in profits for 20 years and write-offs of £2.5 billion.
“This confirms what had been suspected that the dominant force in UK retailing is struggling, whereas not so long ago many viewed it as too large for comfort and a seemingly unstoppable force. What has gone wrong? And how serious are the problems Tesco faces?
Recession blues
“First, Tesco has suffered in the recession for both general and particular reasons.
“Squeezed consumers have seen falls in their real take-home pay and have been focussing on belt-tightening to make ends meet and, in many cases, to try and pay down debts accumulated in the era of easy credit that preceded the financial crisis.
“One notable beneficiary of this consumer austerity has been Aldi, a large and sophisticated German retailer. Many have tried it and found it to be better quality than they imagined and they have picked up market share.
“What is more, Tesco has come under intense pressure from Asda, now owned by the world’s largest retail group Walmart, who are masters of low cost. Adverts claiming Asda beats Tesco on price have been very prominent on TV.
“What is more, Tesco have also faced significant competition from Morrisons and a rejuvenated Sainsbury, for many years the UK’s number one grocer. Tesco has therefore struggled to maintain its image as a good quality and high value-for-money food retailer.
Squeezed
“At the upper end of the quality range, Marks and Spencer and Waitrose have succeeded in maintaining their premium image. This leaves Tesco squeezed in the middle.
“Second, Tesco has had to admit defeat in some of its international expansion. £1.2 billion of its £2.5 billion write down came from the closure of its Fresh & Easy chain in the United States. Almost another £0.5 billion has come as a “goodwill impairment” on operations in Eastern Europe and Turkey.
“Third, Tesco was undoubtedly affected by the recent scandal surrounding horse meat being found in allegedly “beef” products. This has dented consumer confidence, which was ebbing anyway as satisfaction among consumers with Tesco has been moving in an adverse direction.
“Does this mean Tesco is in danger? Is it destined to lose its number one spot? Far from it.
“International expansion is notoriously difficult in retailing. Walmart itself was forced to withdraw from Germany after years of loss making, being unable to outcompete, among others, Aldi. It likewise failed in South Korea. It is still, however an excellent retailer – and the world’s number 1.
Grasping the nettle
“Tesco still has around 30% of the food retail market in the UK, almost twice that of its closest rivals Asda and Sainsbury’s. Tesco is grasping the nettle and launching a campaign of store improvement.
“Almost 100 years ago the economist Joseph Schumpeter declared that even a seemingly entrenched monopolist would be forced to maintain constant innovation or feel the ground “…slipping away from under them.”
“It seems the great man speaks from beyond the grave.”
