Tesco suffered a downgrade to its share price rating from a major stockbroker today amid concerns about whether it can really sustain its current profit margins.
HSBC said Tesco should, rather than keep trying to keep its profitability up with a renewed cost efficiency drive, focus on using its huge might in the market to cut costs and attack its rivals.
It advised its clients to cut the weighting of Tesco in their share portfolios from a “neutral” weighting to “underweight,” and cut its target for the share price from 400p to 340p.
Shares in Tesco fell sharply on the downgrade, losing 3%, or 9.95p to 338p.
David McCarthy, head of European consumer and retail research at HSBC cast doubt on the supermarket giant’s strategy of attempting to keep its operating profit margins at 5.2% at a time when it is expected to lose sales.
He added: “Cost cutting may help short term, but this is likely to result in “consumer unfriendly” actions, causing further sales declines and creating even more margin pressure. Tesco moved onto this vicious spiral some time ago, and so far, all attempts to break the spiral have failed in our view.”
He added: “Tesco needs to make its offer compelling, needs to hurt its competitors and needs to rebuild. But before rebuilding comes demolition.”
Instead of attempting to protect its profit margins, Tesco should cut its prices, “destroying competitors’ cash flows and profits.”
Tesco has a trading statement on its third quarter financial performance due on Wednesday.