Watch out M&S, Sainsbury's, WH Smith, Dixons, FCUK, etc: one-stop Tesco is stealing your sales

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The Independent Online

Finding anyone with anything bad to say about Tesco is nigh on impossible. Ahead of its third-quarter sales update on Thursday, analysts are expecting yet another sterling performance and upbeat predictions from management for Christmas trading. JP Morgan has even upped its pre-tax profits forecasts for the next three years - before the numbers come out.

Finding anyone with anything bad to say about Tesco is nigh on impossible. Ahead of its third-quarter sales update on Thursday, analysts are expecting yet another sterling performance and upbeat predictions from management for Christmas trading. JP Morgan has even upped its pre-tax profits forecasts for the next three years - before the numbers come out.

Tesco, it would seem, can do no wrong.

Except, that is, if you are one of its rivals. As the festive season gets under way, retailers - and not just other supermarkets - will have one more problem to contend with, beside stiff competition, margin erosion and faltering consumer confidence.

"Tesco is doing fantastically well and I would be amazed if it mucks up in any way this Christmas," says Jonathan Pitkanen, a director at credit agency Fitch Ratings. "So there will be victims. Sainsbury's is going to get clobbered, and Marks & Spencer could too because Tesco's clothing offering has got so much better. A greater percentage of the retail pound is going into Tesco's pockets and that means everyone else will suffer." In the markets where it operates, Tesco takes in one in eight pounds that Britons spend.

So what is its secret? A recent Goldman Sachs research note neatly sums it up. "As the business grows, it can create a virtuous circle. Scale enables it to take more of the supply-chain infrastructure in-house, allowing the company to capture more of the margin, build its non-food retailing skills and increase its ability to invest in price. Combined, these factors help non-food to grow all the faster."

Others point to Tesco's management, led by the highly rated Sir Terry Leahy. Comments Andrew Seth, a retail specialist and chairman of marketing consultancy The Ingram Partnership: "Tesco has been well managed. It has a good culture and good people. So far, it has hardly put a foot wrong. They also use consumer information better than anyone else I know. They use it to experiment and try things out, and that's given them a terrific advantage."

And that is what it comes down to: Tesco gives customers what they want, even when conditions tighten. Retail sales volumes fell by 0.4 per cent in October, the first decline in three months. While not all retailers are on the back foot, some, such as French Connection - where shares slumped on a profits warning last week - have issued downbeat updates and there is a sense of nervousness across the sector.

Sheelah Turner, an analyst at Footfall, which measures retail traffic, says that while people are hitting the shops, they are not always buying. "People are out there looking, wanting to buy stuff, but clearly they are looking for bargains. Shoppers are becoming careful."

And with the supermarket chain's reputation for good value, that plays straight into Tesco's hands. Third-quarter underlying UK sales are expected to have grown by 6.6 per cent after a 7.0 per cent hike in the previous quarter, an impressive performance against a backdrop of weakening market conditions and food deflation.

So who will suffer the Tesco effect this Christmas? Of its grocer rivals, high-end Waitrose should remain relatively unscathed. But with recent figures from market research firm TNS revealing that Tesco now commands a hefty 28.3 per cent of the British grocery business, most of the others will be affected, and none more so than J Sainsbury.

The struggling Sainsbury's has a new turnaround strategy, but its chief executive, Justin King, unveiled it only in October, so it will not be able to fend off Tesco this Christmas.

The chain has been cutting prices, and figures compiled by trade magazine The Grocer show that they now have more in common with Tesco than Waitrose. But as one retail insider notes, that is not the public perception: "Prices have come down, but even if they are, say, just 5 per cent above Tesco, the public perception is that they are 10 or 15 per cent higher."

Nor is it just the supermarkets that could suffer. Paul Smiddy, a retail analyst at broker Robert W Baird, says: "Tesco's ambitions in non-food have got greater and greater, and its aggression in general merchandising is strong. So it will bang up against the likes of Comet, Argos and the book and music sellers."

The electrical goods sector has already revealed just how tough the competition is, with Dixons' chief executive, John Clare, warning only last week of ongoing pricing pressure.

Mr Pitkanen says: "People know they are getting better value for money at Tesco, and it doesn't matter if it's food, clothes, digital TVs or whatever. Dixons [branded] stores didn't have the cutting-edge stuff or the range. They have the commodity stuff and that's where the competition is."

Another high-street retailer expected to languish in Tesco's shadow is WH Smith. Like Sainsbury's, it has been one of the year's strugglers, and its new chief executive, Kate Swann, is also implementing a turnaround strategy.

But Tesco is understood to have already spotted the weakness, apparently placing record orders of wrapping paper, crackers and cards in a bid to steal business.

Arguably one of the biggest victims, however, will be M&S. No one is expecting a sterling performance from the ailing giant, and Tesco will not help matters with its strong offerings in food and clothing. As one City analyst predicts: "M&S will most definitely feel the pinch."

For the foreseeable future, at least, in a market where consumers are demanding good value, one-stop shopping, Tesco makes competition tougher across the entire sector.

Festive sales are notoriously difficult to predict, and not until the numbers come out in January will the final winners and losers be revealed. But few doubt where Tesco will end up. Says one JP Morgan analyst: "The gap between Tesco and the industry is widening. Perhaps the implication is not all that surprising: when price is the issue, as it has been this year, Tesco is always likely to be a winner in our view." For the rest of the sector, it is the losers it creates along the way that will cause the problems.

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