Margareta Pagano: Tesco must decide: price or quality – or both?


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The Independent Online

Like any sensible shopper in these tough times, I plotted the Christmas food shopping with the zeal and precision of a general going to war – and 12 people feasting over three days is an expensive battle.

Oddly enought, it was at Waitrose that I found some of the most ferocious cut-price offers – like the two-for-one antipasto platters – but also, because it's such an enjoyable place to shop, I piled the trolley high with luxury cheeses and Stollen cakes. The local market had by far the freshest fruit and veg, while the bird and beef came from my local butcher. That left Tesco for leftovers and that wasn't much; pickled chestnuts, cabbage and cornichons come to mind.

Who knows whether this division of spoils saved a penny, but there was the satisfaction that the food was fresh and our household income had been spread between the big supermarkets and the independents. But the point is that out of the hundreds of pounds spent, only about £50 was spent at Tesco. It seems the rest of the nation's shoppers took an equally dim view of Tesco's offering as they shunned the giant retailer, lured by promotions to rivals such as Waitrose and Sainsbury's for the top end of their food buying, and to Aldi and Netto for their bulk buys.

It's no surprise that Tesco's poor Christmas figures – sales down by 2.3 per cent is a chunky drop – and the profit warning for this year have shocked markets around the world as well as here in the UK – after Wal-mart Stores and Carrefour, it's the world's third-biggest retailer, with a big presence in emerging markets. That's why what Tesco does is so important to the analysts, as it shows exactly what's happening in the intensely competitive global grocery market, but also in electricals and clothing where online retailing is having such an impact.

It was surprising that Tesco's chief executive, Philip Clarke, admitted to being caught unawares by the public's reluctance to spend in his stores, and also by his rivals' aggressive price cuts. If Clarke had been watching the domestic market carefully, he would have seen that Tesco's fresh foods and service, compared with competitors', have been wilting for some time. Belatedly, Clarke promises to improve customer service, as well as value and quality. His biggest problem will be deciding on this balance – is Tesco about price and value, or about quality? Can it do both, as Waitrose does?

One who did spot Tesco's troubles was Stephan Shakespeare of YouGov, which publishes an online brand tracking tool, BrandIndex, measuring companies daily for their quality, value, customer satisfaction, corporate reputation and so on. Shakespeare warned in December that the juggernaut was slowing down as the Tesco Index had fallen sharply over 2011 – from 32 to 22, below Morrisons and above Asda. Like so much of social media, tools such as BrandIndex – which polls thousands of people for its research – are showing how fickle and fastidious the public is becoming, and how immediate it switches shopping habits.

Tesco has changed its spots before and I'm sure it can again once management turns back to basics: I'll let you know after shopping this Christmas whether it has improved. For now, though, shoppers should stay away from the shares – which crashed 16 per cent on the profits warning to 323p – at least until they slip below 300p.

Oh, Darling! Ex-chancellor is perfect choice to take on Salmond

Alistair Darling is an inspired cross-party choice to persuade the Scots to back the Union, and hopefully he will take up the flag with enthusiasm.

He's popular in the Commons, and the ex-chancellor has many admirers within the business community for his careful handling of the banking crisis. Standing up to his fellow Scot, Gordon Brown, should also prove a good rehearsal for taking on Alex Salmond, once vividly described by a colleague, Michael Maclay, as a cross between Machiavelli and Yogi Bear.

Darling will have fun teasing Salmond on the big economic stuff: will Scotland join the euro or stay with sterling? If Scotland were to leave sterling it won't get an opt-out of the euro now. Or, if it stays with sterling, who sets interest rates? Will a proportion of national debt be transferred on to a new Scottish balance sheet? Who gets the North Sea oil revenues? And what about the £10bn subsidy?

Who knows, the forthcoming debate could prove to be the perfect rehearsal for Darling for a bigger fight: having a go for the Labour leadership when the Miliband sibling war finally erupts – as it surely must.

Hester is right – under political pressure or no – to move RBS out of risky trading

The story at Royal Bank of Scotland’s investment bank just gets worse and worse and, I’m told, there is worse to come.

Trading in the last quarter was appalling, far worse then the market has been expecting and there will be big losses. Part of the reason is that fixed overheads – mainly salary costs which have been pushed up to compensate for bonus cuts – have shot up by more than 100 per cent.

The signs were there – third-quarter results showed an operating profit of only £80m – down by about 85 per cent on the previous year.

That’s why RBS’s chief executive Stephen Hester is slashing 3,500 jobs and closing the investment bank’s cash equities, corporate broking, equity capital markets and mergers and acquisitions business – unless buyers can be found. The bits which are left – fixed income, foreign exchange, debt financing and risk management – will join the corporate transactions side of the bank to create a new division – Markets and International Banking which now employs about 13,400 people compared to 18,900 soon after the bank collapsed.

In other words, MIB has been pared back to the sort of business it was more than a decade ago before Sir Fred Goodwin decided to compete with the big US houses.

Hester’s decision to cut back on the more risky trading – so deleveraging the balance sheet – and pull out of the more volatile, cyclical M&A business is the right one. He should ignore internal criticism that political pressure rather than commercial logic prompted the move.

But, he should bow to political pressure and keep bonuses to a minimum. With markets so depressed, Hester is smart to get out before things deteriorate further;investment banking has always been a feast or famine business and we’re still in the latter. Investors know that, which is why shares are rising after the cull. At 23p, it could even be time to buy.