Every little helps Tesco keep its competitors at arm's length

It's the undisputed king of the supermarkets, but how easy lies the crown?
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The Independent Online

When Tesco's chief executive, Terry Leahy, announces the company's full- year results on Wednesday, it will appear that his position as king of the UK supermarkets is secure. He is expected to announce huge profits, increasing sales and the largest market share of its rivals.

Tesco has reigned supreme ever since it caught the previous number one, J Sainsbury, sleeping on the job in 1995, and ruthlessly executed a coup in terms of market share and profits. But some observers are beginning to say that the crown might be slipping.

For a start, some analysts say Sainsbury's is winning customers back from Tesco. Trading figures from the last quarter of 2001 suggested that Tesco's growth was slowing, while Sainsbury's was starting to recover. Sir Peter Davis, the chief executive brought in to turn Sainsbury's round, certainly found reason to celebrate, saying the figures "brought joy to our hearts". Asda, which was bought by US discount giant Wal-Mart in 1999, is also poaching Tesco customers, according to research house AC Nielsen.

But Sainsbury's and Asda shouldn't celebrate too soon. "Tesco's growth has slowed up, but it's done it before and picked up again," says Edward Garner at Superpanel, a research division of Taylor Nelson Sofres (TNS). "However, Sir Peter probably does have reason for looking a bit more bushy-tailed, although we're not talking about a rapid phoenix rise from the ashes."

The problem for rival supermarkets is that Tesco is miles ahead. Currently, says TNS, it has market share of around 25.4 per cent against Sainsbury's 17.7 per cent. Snapping at Sir Peter's heels is Asda with 15.9 per cent and gaining rapidly. Safeway's chief executive, Carlos Criado-Perez, is running in fourth position with 10.2 per cent of the market.

The battle for supremacy seems such a foregone conclusion that even Sir Peter has admitted Sainsbury's is unlikely to be number one ever again. But that hasn't stopped the supermarkets getting vicious in their efforts to gain market share. Tesco, Asda, Sainsbury's and Safeway are all jazzing up their stores and trying to sell more non-food products, like CDs, toasters and clothes.

But the bloodiest joust is on cost. "Price is replacing convenience as the key battleground," says Sally Bain, a senior analyst at retail specialist Verdict Research.

All the big supermarkets, with the exception of Sainsbury's, claim to be the cheapest. But Tesco seems to be going too far, and its advertised claims are often found as misleading.

Last year it said in advertisements that it was 13 per cent cheaper than Sainsbury's, 14 per cent cheaper than Boots on some products, and also cheaper than Amazon.co.uk on music and books. The Advertising Standards Authority said the ads had to be changed.

Then in February, when Tesco said it was reducing prices on 1,500 goods, it didn't shout quite so loudly about the 1,750 prices that had risen since Christmas.

Trade magazine The Grocer stepped into the argument late last year with a survey revealing that Asda was by far the cheapest supermarket.

In reality, say the experts, it's impossible to tell who's cheapest. "There's a lot of PR bluster going on," says Ms Bain at Verdict. "Overall, it's very difficult to make a like-for-like comparison because [some prices] change on a weekly basis."

Pricing has become very complex. Some supermarkets, such as Asda and to a lesser extent Tesco, claim to have lower prices across the board. In industry jargon, this is called "every day low prices".

Others, such as Safeway, have "high low" pricing, Here, some prod- ucts are very cheap, although the selection will change regularly, but others are more expensive to even things out for the supermarket. "The advantage of 'high low' is the wow effect," says Ms Bain. "But 'every day low prices' is more of a loyalty-building, 'you can trust us' positioning."

Safeway has demonstrated another problem with "high low". While the number of customers visiting its stores is increasing, it reported sales towards the lower end of analysts' expectations at Christmas.

"At Safeway a lot of shoppers are cherry-picking, so they are only buying when it's 'low' and then buzzing off and buying somewhere else," says Mr Garner at Superpanel, although he does point out that the supermarket's refurbishment programme could change its fortunes.

Despite Tesco's claims for low prices, it's still raking the money in. A consensus of City research predicts that pre-tax profit will be £1.2bn, up around 10 per cent on the previous year. But however large this amount sounds, City analysts have high standards, and detractors have started to appear. ABN Amro is the leader of the pack after launching a blistering attack on Tesco late last month. It said that the growth of the past three years, from £842m in 1999 to the expected £1.2m for the financial year to February 2002, is not all it seems.

ABN Amro is stockbroking adviser to Sainsbury's, which could introduce an element of bias. However, it has proposed an interesting theory.

The crux of its argument for selling Tesco shares is that over the past three years the group has only managed to meet the City's tough expectations for growth by overspending on building new stores – by a cool £1.3bn. It has certainly expanded quickly – from 820 stores in 1999 to a current total of more than 1,000. Tesco is likely to try and explain this to analysts at the results.

ABN Amro has also alleged that the group has changed its depreciation policy – how quickly it writes off the value of its assets – to influence the profits favourably.

Tesco rejects that allegation and other, more Tesco-friendly analysts also say there is no evidence to back up the claim.

But if ABN Amro is right, the broker puts forward two reasons why profits in the past three years could have been below expectations. One is that margins on non-food products are under pressure due to intense competition. Otherwise its international expansion programme could be performing worse than expected.

It is true that Tesco's expansion programmes in Eastern Europe and Asia have not yet proved their worth, as the profits reported so far are tiny. "This year has to be the first proving year in which Tesco will have to demonstrate that organic investment has delivered rather than just showed great potential," says Clive Black, an analyst at broker ING Barings.

At least Tesco has an international programme; none of the other UK supermarket companies can compete in this area, unless you count Asda and its parent, Wal-Mart. It marks Tesco out as the leader and, if the international programme doesn't fail, it will look impregnable. "Unless Tesco suffers a strong attack of smugness, it will be very difficult to beat," says one industry observer.

But this isn't impossible. It was smugness at Sainsbury's that let Tesco beat it in the first place.

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