Both Tesco and Sainsbury’s announced their financial results for the first half of the year this week: Sainsbury’s has reasons to smile, while Tesco saw its profits decrease for the first time in nearly two decades. Meanwhile, Aldi and Lidl force Tesco into a defensive position that could be fatal for a company with a business formula that is not sufficiently distinctive.
Of winners and losers...
Compared to the same period in 2011, market leader Tesco saw its profits decrease by 12.4 percent on the British domestic market. Moreover, the like-for-like turnover decreased by 0.7 percent. Sainsbury’s did not publish global profit figures, but can take pride in a growth of its like-for-like turnover by 1.9 percent.
Although Tesco is still way ahead of its competitors in terms of market share in Great-Britain, Sainsbury’s is slowly closing the gap. The supermarket chain does not only achieve this success by its food sales – its core business - but mainly through non-food.
Fast-growing private label penetration
In the food department, Sainsbury’s owes its success to its private labels ‘By Sainsbury’s’ (a low-cost label that fits the company’s slogan ‘Live Well For Less’) and the slightly more up-market range ‘Taste The Difference’. “We are seeing the benefit of our on-going investment in our own-label ranges”, says chief executive Justin King. “Our own-label penetration is increasing at the fastest rate of any of the major supermarkets.”
Sainsbury’s online turnover has grown by twenty percent and its range of convenience stores has firmly contributed to its growth as well. In the first half of the year, Sainsbury’s opened no less than 49 new convenience stores, as well as five new supermarkets. Last week, the company was rewarded for its achievements when it was once again named best supermarket and best convenience store of the year.
Big investments, little confidence
Tesco is in no such winning mood: the market leader invests one billion pounds (1.25 billion euro) in a turnaround plan, that has been aptly named ‘Investing in a better Tesco’. In an interview on its website, chief executive Philip Clarke is not surprised that profits have decreased in the first six months of the year. “It is a confluence of a big investment and a decreasing consumer confidence, both in the United Kingdom and in the rest of the world”, according to Clarke.
On the British domestic market, Tesco's half-year profits decreased by 12.4 percent, down to 1.1 billion pounds (1.38 billion euro). Outside Great-Britain, Tesco’s profits even fell by 17.1 percent, compared to the first half of 2011. Half-year profits in the twelve foreign countries amounted to half a billion euro.
'The British love Waitrose, Aldi and Lidl'
‘Investing in a better Tesco’ is indeed necessary: in their comments on the half-year figures, both King (Sainsbury’s) and Clarke (Tesco) mention difficult circumstances on the markets and consumers’ frugality, but while Sainsbury’s has not been affected too much, the crisis did deal Tesco a heavy blow.
Tesco is ubiquitous in Britain and consumers fail to see anything special in the brand. They seem to be more charmed by up-market formulas, such as Waitrose, or German discount stores Aldi and Lidl. The Germans have created an image of service discount stores in Britain, where consumers get good value for their money.
The British seem to be highly sensitive to this: research conducted by IGD earlier this year revealed that almost a third of all consumers intended to visit Aldi and Lidl more often. “It is no surprise to us that more shoppers seem to be turning to Aldi and Lidl, as they are certainly popular with Which? members. In our last supermarkets survey, only Waitrose received a higher customer score than Aldi or Lidl”, shopping expert Matt Clear from British consumer organisation Which? said in June.
Aldi UK wants to double number of shops
Aldi UK has been the fastest growing British supermarket for a number of years, with 29 new shops opened last year and another 40 coming up this or next year. That would lift the number of Aldi shops over 500, a number that could be doubled to 1000 discount stores in ten years’ time, according to Aldi UK's managing director Roman Heini.
In 2011, Aldi UK’s turnover rose 29 percent to 2.76 billion pounds (3.44 billion euro); operating profit went up 450% to 103 million pounds (129 million euro). After a loss of 56 million pounds (70 million euro) in 2010 due to an enormous depreciation of Aldi UK’s real estate, the discount store returned to being profitable last year.
Tesco recovery plan seems successful
Aldi and Lidl maintain their focus firmly on the British middle class, whose disposable income has come more and more under pressure. In doing so, both companies are becoming important rivals for Sainsbury’s, Tesco and other big retailers in the densely populated middle class section of the British consumer market. Sainsbury’s, relying on its ‘Live Well For Less’ strategy, seems better prepared to deal with the pressure than Tesco, that has started investing an enormous amount of money in its recovery plan.
Tesco chief executive Clarke remains optimistic and thinks his recovery plan will turn out well: “Although it is still early, it is fair to say our recovery plan is nicely on track”, he says. “In the second quarter of the year, the like-for-like growth in the United Kingdom has already improved.”
Indeed, Tesco's UK like-for-like turnover grew 0.1 percent in the second quarter of 2012, a nice improvement compared to the 1.5 percent decrease in the first quarter of the year. On a half-year basis, the like-for-like turnover figures showed a decrease by 0.7 percent.
South Korea and the euro zone
In its international branch, Tesco will see the end of a line of 15 years of increasing profits. “That was always nice for our shareholders”, says Clarke, “but in the first six months of this year, we were confronted with two factors. First and foremost, legislation in our biggest foreign market, South Korea, does not allow us to stay open 24 hours a day. We are also forced to close our shops two Sundays out of four every month.”
The second factor keeping down the profits is the continuing crisis in the eurozone, putting Tesco’s trading business in Central Europe under pressure. Clarke: “Consumer confidence is at a low on many of the markets we are operating, especially in the eurozone, where uncertainty reigns. This affects our turnover and profits in Central Europe and Ireland.” In Central Europe, Tesco has outlets in Slovakia (within the eurozone) and in the Czech Republic, Poland and Hungary (outside).