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Tesco

Is Tesco’s brand finally on the road to recovery?

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By Seb Joseph, News editor

October 7, 2015 | 5 min read

Tesco’s bid to fix the fundamentals of its shopping experience appear to be on track, with investments to improve the customer experience arresting its sales decline after a traumatic year.

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Green shoots of recovery are apparent at the UK's biggest supermarket with more people coming to its stores following wholesale changes that include a slimmer product lineup, more stable prices and less reliance on short-term couponing. The gains have translated into sales at stores open for more than a year down one per cent in the second quarter, an improvement on the 1.5 per cent drop it posted in the first.

Transactions and the volume of products sold both rose in the period, although the decision to slash prices, revamp customer services and increase product availability took its toll on profit. Operating profit halved in the first six months of the year, falling to £354m with chief executive Dave Lewis adamant that the business is in a much stronger position to tackle the problem areas of cost and margin in order to maintain bottom line profit.

“We have delivered an unprecedented level of change in our business over the last 12 months and it is working. The first half results show sustained improvement across a broad range of key indicators,” said Lewis. “In the UK, we continue to improve all aspects of our offer for customers, resulting in volume growth which is allowing us to create a virtuous circle of investment.”

If this period of growth is to be long-term then Tesco will need to leverage its size to properly address its flagging sales momentum.

“Tesco is not alone in its pain. Two of the other big four supermarkets are seeing sales slide at a faster rate. But with all the big players reducing prices and consistently low food inflation, no one should expect a quick return to sales growth,” said John Ibbotson, director of the retail consultancy Retail Vision.

“But Tesco’s size remains its trump card. At nearly twice the size of its nearest rival, and with the highest margins of any of the big four, it can use its scale to hold down prices longer than anyone else. Dave Lewis’ reduction in range and prices will eventually get shoppers back into Tesco stores, but the question is how much time will he be given to do so?”

Tesco has weathered a stormy two-year period that has seen its market share nosedive in a fierce grocery price war, the effect of which has been compounded by a tarnished brand following a series of scandals. But Phil Dorrell, partner at Retail Remedy, believes today’s results show a company that is “ready to move from intensive care into the recovery ward”.

“Let’s be clear, Tesco isn’t cured but it is definitely over the worst,” he added. “It seems extraordinary that only 12 months after a major accounting scandal Tesco is one of the stronger of the 'Big Four' and testimony to Dave Lewis’ leadership.

"The store experience is better than it was, cleaner prices and less confusing promotional elements, improved service which we have witnessed and welcomed and range rationalisation being delivered without undue distraction. This is the Tesco we believe the customer wants and with a little more time will be delivered. We should expect more bold decisions in Tesco’s short-term future but ones that are all bolstering Tesco’s recovery in a disrupted market.”

Despite being a marketing man at heart – given his background at Unilever – Lewis’ reign so far is summarised by the back-to-basics ethos he has tried to instil at Tesco since he joined last September. The retailer also appointed Michelle McEttrick as brand director from Barclays in May to help win back consumer trust after reports it had fiddled its accounts; the results of McEttrick early tenure are likely to come to the fore in Tesco’s Christmas campaign, the supermarket’s first major advertising campaign with BBH.

The results come a week after Sainsbury’s revealed it too had seen sales ease in the quarter, confirming what some analysts predict is stabilisation coming to the supermarket space. It’s interesting to note that the growth to date is being gained not from big advertising campaigns but more iterative strategies designed to reform the shopping experience and foster more loyalty among shoppers through better pricing.

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