View from City Road: Price problems not over for battered Tesco

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The Independent Online
David Malpas, managing director of Tesco, allowed himself a little pride yesterday as he pointed to the supermarket group's success in surviving last year's pricing earthquake in good spirits, if not intact.

The question he still has to answer is how severe the aftershocks will be. The damage caused by the tremors may have been well flagged, but it was no less severe for all that.

The drop in margins caused by initiatives such as the bargain basement Value range was so severe that even a 10.3 per cent rise in sales was not enough to keep underlying profits moving ahead.

The write-offs required following the belated recognition that the life of a superstore is not infinite - and nor is the scope for peppering the country with them - meant that Tesco's pre-tax profits fell for the first time in living memory.

Tesco is cautiously optimistic that last year's price cuts were a one-off readjustment, rather than the start of a downward spiral.

Certainly - like Sainsbury and Safeway - it has invested far too much in state-of-the-art superstores to risk precipitating a 1970s- style price war. Others, like Gateway - still locked in a fight for survival - or the foreign discounters may be less circumspect.

The price campaign launched by Kwik Save last week, albeit apparently inspired by tax rises, demonstrated that the price issue will not go away. Tesco's caution about gross margins in the current year, despite a 'pleasing improvement' so far, show it is well aware of that.

It also makes plain that shareholders can expect to see little of the benefit of cost-savings and productivity improvements in the pipeline. Instead, these will all be channelled into advertising and service improvements aimed at bringing shoppers back into the stores.

If it succeeds - and even Tesco admits that it could take up to two years before the market stabilises - profits should start rising again.

But growth is likely to settle at about 2 per cent a year, rather than the 20 per cent-plus enjoyed during the 1980s. That will shift investors' focus to dividends rather than earnings. By increasing its dividend by 9.2 per cent, for a 4.4 per cent yield, Tesco is signalling it is conscious of that fact.

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