Poor Christmas hits Tesco shares
Thursday 12 January 2012
Tesco saw billions of pounds wiped from its shares today after the supermarket admitted it messed up its pricing strategy in a "disappointing" Christmas.
The blue-chip stock slumped by an unprecedented 15% - equivalent to more than £4 billion - after chief executive Philip Clarke said the grocer had failed to pull in enough customers with its £500 million Big Price Drop campaign.
The update forced City analysts to slash their full-year profit forecasts by around 15% and raised fears that the floundering UK performance over the festive period would hit future growth.
Tesco, which has 2,700 stores in the UK, reported a "disappointing" 2.3% decline in like-for-like sales excluding VAT and petrol in the six weeks to January 7, which came in below its own expectations.
Mr Clarke, who joined as chief executive less than a year ago, said the supermarket wrongly pulled back on one-off promotions, such as meal deals and buy one, get one free offers, as its rivals increased them.
"I've got to acknowledge that we backed off on some of our promotion and coupon activity just as everyone upped it," he said.
Tesco's price campaign, which saw the cost of 3,000 everyday products reduced, prompted Sainsbury to introduce its Brand Match scheme and Asda to offer a guarantee to be 10% cheaper than rivals.
There were fears that Tesco's campaign has failed to strike a chord with customers because it is funded by a reduction in Clubcard points and one-off promotions.
Yesterday, rival Sainsbury's reported a 2.1% increase in like-for-like sales excluding fuel but including VAT in the 14 weeks to January 7, with analysts estimating sales would have been flat if VAT was taken out of the figures.
And earlier this week, research figures revealed Tesco's market share for the 12 weeks ending on Christmas Day dropped from 30.5% a year ago to 30.1%.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said the trading update was "something of a profits warning for the year".
He said: "Unfortunately the 'Big Price Drop' reported in this update will be remembered as more reflective of the shares than the campaign."
The supermarket's weak performance was driven by food sales rather than general merchandise, clothing and electricals, which saw growth overall.
The division saw an improved performance in electronics, driven by strong sales of tablet computers and e-readers.
Tesco said online sales were strong in both food and non-food with growth of more than 14%, and approaching one million orders being placed with Tesco Direct during the period.
Mr Clarke said: "In a challenging economic environment, we made good progress internationally but despite record sales, we are disappointed with our seasonal trading performance in the UK."
He said the price-cutting campaign was an "important first element" in tackling issues in the UK but added: "There is much more we can do to further improve our shopping trip for customers and we are determined to move faster."
Tesco said it will be investing "hundreds of millions" in improving the quality and range of its offering and further lowering prices.
Looking ahead, Tesco said that while underlying pre-tax profits will be broadly in line with forecasts, group trading profit growth will be around the low end of expectations.
Total international sales over the period grew at 8.2%, with strong performances in key regions such as Asia and Europe.
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