Tesco will cut costs despite decent Christmas

Tesco will cut costs despite decent Christmas

British supermarket chain Tesco has said it will cut costs and will not pay dividends this year after disappointing third quarter sales. A small positive note in all that is that the British market leader managed to improe during the holiday period.

Christmas performance better than quarterly results

In the 19 weeks leading up to 3 January 2015, Tesco's British like-for-like turnover dropped 2.9 %, but it would have been - 4.2 % without the Christmas period. That means Tesco has managed to limit the damage to its turnover with a huge stimulus towards the Christmas period.

 

For Christmas 2014, Tesco had a 0.3 % like-for-like turnover drop, a huge improvement on the dramatic 2.4 % drop during the 2013 Christmas holiday. Tesco's Christmas performance last year was worse than its full-quarter result (which reached - 1.5 %), but fortunately for the supermarket chain, it managed to turn that situation around this year.

 

CEO Dave Lewis feels strengthened by the numbers: "A broad-based improvement has built gradually through the third quarter, leading to a strong Christmas trading performance. Our recent performance gives us confidence that when we pull together and put the customer first we can deliver the right results."

 

International like-for-like turnover also dropped

Despite its hope-inspiring run during Christmas, its most recent quarterly performance (- 2.9 %) is significantly worse than the - 1.5 % turnover drop in the previous year's third quarter. On the other hand, it is better than the first two quarters of Tesco's fiscal year, where its like-for-like turnover dropped 3.7 % in its first quarter and 5.4 % in its second quarter.

 

Tesco's international turnover is also slipping: Tesco's non-UK quarterly turnover dropped 2.7 % on a like-for-like basis, with Asia as the biggest problem region (- 4.6 %). Tesco has managed to limit its European like-for-like turnover drop to 0.4 %. All numbers added up, Tesco Group's third quarter turnover dropped 2.7 %, which is an improvement on the first two quarters (- 3.2 % and - 4.8 % for its first and second quarter).

 

Structural cost-cutting measures

To safeguard its future, Tesco will focus on its competitive edge on the British market. In order to be able to invest in price drops, to compete with other British retailers, it will structurally lower its costs. A one-time 300 million pound (380 million euro) investment has to simplify store operations, restructure central overhead costs and improve its options for labour flexibility. The goal is to get an annual recurrent 250 million pound (320 million euro) cost benefit.

 

Other thorough cost-cutting measures are the closure of 43 onerous stores, a reduction of its investment budget and the closure of one of its two main offices. The Cheshunt office will close and all Tesco UK and Tesco Group managers will work from one location: Welwyn Garden City. There was also bad news for investors as Tesco has decided it will not pay dividends for its 2014/15 year.

 

It is a clear signal from Dave Lewis: he is there to help turn things around for Tesco, not to please investors in the short term. Seeing the state the retailer is currently in, this will be a long-term project: "We have some very difficult changes to make. I am very conscious that the consequences of these changes are significant for all stakeholders in our business but we are facing the reality of the situation."

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