Tesco steps up its turnaround

As tough conditions persist, Tesco signals that the company is ready to go a little bit further in a bid to drive customers back to its stores.

The retailer, which hosted a seminar for investors and analysts on Tuesday, announced plans that it hopes will speed up the turnaround initiatives of its troubled UK business (UK contributes the bulk of its revenue – 66% in fiscal 2013).

Those plans include further scaling back on the number of new stores it’s set to open this year; and an investment of some £200m, which it will dedicate towards cutting prices on basic products.

Certainly, Tesco has had its fair share of issues over recent years, partly driven by tough competition from rivals. 

Most notable, of course, are the so-called discount retailers: the likes of Lidl and Aldi, which have been steadily gaining market share as cash-strapped customers gravitate towards their cheaper offering.

In the face of flagging sales, shrinking profit margins and a declining share price, Tesco embarked on a turnaround plan some two years back in a bid to differentiate itself and lure back customers.

Based on the ethos that good ‘customer experience’ would prevail, the company announced that it will cut back on opening new stores and instead channel some of the investment into the refurbishment of some of its stores.

Improving the customer experience, for Tesco, included ramping up the number of employees and opening up restaurants – the company even shelled out around £48m to acquire UK-based restaurant chain Giraffe in March last year.

Of course, following the company’s update last month on trading figures over the Christmas period, questions abound as to the merits of the retail heavyweight’s current strategy.  

With the company’s stock down around 3% on the back of its latest announcement, it seems those questions remain unanswered.

Well, it’s true that the company is in the second year of its attempt to reignite growth in its UK business, with no significant results as yet.  And the latest announcement simply seems in line with increasing momentum on its existing strategy.

But it bodes well that that the company is slowing down even more on new store openings. Let’s face it, the rise in online-grocery shopping looks set to continue.  And spending to maintain low prices on ‘everyday’ products can’t be a bad thing for the company.

Of course, it’s worth noting that those aforementioned rivals are not going anywhere and, as long as consumers’ purse strings remain tight, those players are likely to continue enjoying the benefits.

Still, it’s a step in the right direction. 

And, importantly, the fact that Tesco’s approach is based on a long-term view is quite clear.  It’s therefore arguably irrational to expect immediate results.