Tesco Commits to Lower Prices as Grocer Hits Back at Discounters

Tesco Plc, the U.K.’s largest retailer, will offer permanently cheaper prices on some items to replace overly complex promotions as it seeks to stem hemorrhaging sales and reverse a declining share of the market.

The supermarket chain, whose domestic sales have weakened for more than two years as shoppers turn to both discounters and upscale grocers, is committed to “lower, more stable prices,” U.K. chief Chris Bush said yesterday. Tesco will spend an additional 200 million pounds ($333 million) a year making permanent cuts to prices on everyday items such as carrots and cucumbers, he said at an investor conference in London.

The grocer’s promotions had become too complicated, Bush said, further alienating shoppers who have been deserting to discounters Aldi and Lidl as well as more upscale chains such as Waitrose. The market share of Cheshunt, England-based Tesco has fallen to 29.2 percent from a 2007 peak of 31.8 percent, according to researcher Kantar Worldpanel.

“Our numbers are not where we want them to be,” Chief Executive Officer Philip Clarke said at the conference. A reduction in spending on opening supermarkets announced yesterday will free resources to accelerate growth in the fast-growing areas of online and convenience stores, he said.

Tesco shares rose 0.5 percent to 335.2 pence at the close of trading in London.

Price Cuts

Among permanent price cuts being introduced by Tesco, a 1 kilogram bag of carrots is reduced to 80 pence from 1 pound, while the cost of a cucumber falls to 49 pence from 65 pence.

The grocer’s move comes three months after Wal-Mart Stores Inc.’s Asda chain, which is vying with J Sainsbury Plc for the position of Tesco’s biggest domestic competitor, said it would invest 1.25 billion pounds in price and quality improvements.

Tesco stopped short of the wide-scale price reductions that would have caused it to abandon its targeted U.K. profit margin of 5.2 percent, as some analysts had been advocating.

“The margin will be what the margin will be,” Clarke said at the conference, declining to be drawn further.

Tesco’s silence on the outlook for profitability “suggests management are no longer wedded to the 5.2 percent margin and in a way we believe this is a silent acknowledgement that profits will decline in the near term,” Pradeep Pratti, an analyst at Citigroup Inc. in London, said by e-mail.

Tesco plans to accelerate a store refit program that it said is already showing positive results. More than a third of the grocer’s stores have been updated and sales, profit and margins in those outlets are ahead of the others, it said. The target is for all locations to be updated by 2017, Bush said.

Capital Spending

“What we want is the most compelling offer for customers,” Clarke said. “That’s going to take us some time.”

Tesco said it will add 150 new convenience outlets a year and make its market-leading online grocery business an even greater area of focus. The online unit made trading profit of 127 million pounds last year, the company said.

Capital spending will be reduced to no more than 2.5 billion pounds a year over the next three years as Tesco continues to scale back investment in store expansion. That compares with a capital outlay of 3 billion pounds in its last financial year and a 2009 peak of 6.6 billion pounds.

The revised capital spending goal is only slightly below consensus estimates of about 2.6 billion pounds, according to Andrew Gwynn, an analyst at Exane BNP Paribas in London.

Tesco plans to add 0.7 million square feet (65,000 square meters) of new space in the 2015 financial year. That’s half of last year’s 1.4 million square feet, itself down 40 percent from the prior year.

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