Tesco is one of the worlds leading international retailers. Since the company first the trading name of Tesco, in the mid 1920s, the group has expanded into different formats, different markets and different sectors. The UKs leading retailer Tesco was floated on the stock exchange in 1947 and in 1995 took over rival Sainsburys position as the UK number one. The principal activity of the group is food retailing, with over 2,000 stores worldwide. Tesco has a long term strategy for growth, based on four key parts: growth in the Core UK business, to expand by growing internationally, to be as strong in non-food as in food and to follow customers into new retailing services. The company launched a home shopping service in 2000, allowing customers to order their shopping online. Tesco is now expanding its convenience stores and overseas into areas such as Taiwan, Malaysia, Poland, the US and Ireland.

Upper graph = 12 month share price with 6 month moving average
Lower graph = 12 month volume (red line = volume average).

Tesco's bullying tactics: Supplier tells Mail of harsh treatment by powerhouse
By RUPERT STEINER FOR THE DAILY MAIL

PUBLISHED: 01:03, 22 October 2014 | UPDATED: 01:03, 22 October 2014

Tom Salmon was on holiday in Tenerife when the crisis engulfing Tesco begun to unfold. The former managing director of Hedon Salads, one of the grocer’s key producers of aubergines, tomatoes, cucumbers and peppers, started having flashbacks.

Details that Britain’s biggest retailer had inflated profits by £250m, suspended staff, and launched an investigation into the way it conducts its business with suppliers, even made it over to the volcanic Spanish island.

Salmon, pictured, had experienced first-hand the relationship between the grocer and some of its suppliers that is being examined in an internal probe.



Most of the supermarkets, along with Tesco, strike similar arrangements with their suppliers.

Salmon hopes that by exposing some of the practices of the previous Tesco management, it will help the grocer start with a clean sheet when it updates on the progress of its investigation tomorrow.

His story comes with some qualifications: Salmon left the firm three years ago so his experiences are historic.

However, they reflect a time when the highly regarded former chief executive Sir Terry Leahy was at the helm.

It is also important to know that Hedon Salads collapsed into administration in 2012.

There is no suggestion that this was as a result of any of its dealings with Tesco. It supplied a number of retailers.

Hedon was the prominent supplier of fresh salad to Tesco, owning large glasshouses.

‘My company has supplied all the major retailers and I have over 40 years’ experience in the ways that they work,’ Salmon said.

‘I thought my story may help in some way explain what suppliers have gone through and give a slightly different perspective on the demise of Tesco.’

From 2002 he says Tesco started to change the way it did business and the supplier became more responsible for the prescribed profit margin that Tesco’s buyers had to achieve.

He said that over the years Tesco introduced extra charges to the supplier.

‘As time went by these charges became more onerous, first it was to pay for new quality ideas’, he said. ‘They charged for new a label system, they charged for the introduction of new technology and they took the same line every time.

‘If you want to supply Tesco you have to pay. As the years went by the charges became more unreasonable, the buyer’s profit margin was down and he or she was not going to make their bonus.

‘What were we as a supplier prepared to pay at the start of next season before the buyer would even consider us as a supplier?’

For decades, big suppliers such as Kellogg’s, Coke and Gillette have paid supermarkets to help fund promotions to shift more of their goods. This can mean they contribute to advertising campaigns on television and in newspapers, or they might fund a special display in shops.

Sometimes, when items are discounted, say from £9 to £5, it is the suppliers that pay the £4 difference. On top of this, suppliers also pay supermarkets fees to place their items in the best positions on the shelves.

At the delayed interim results on Thursday new chief executive Dave Lewis will reveal the early results of an internal investigation. It is likely to show a small group of executives struck deals with some suppliers to bring forward the payment of contributions to flatter the earnings of a particular quarter, while pushing costs into a future quarter.

But apart from this ‘inappropriate behaviour’ it may also show a culture where earnings are generated from opaque and arbitrary side deals which appear to have been integral to the financial model.

Salmon says: ‘My company also had to face a wave of supplementary charges.

‘We had to buy all our packing from a stated supplier from which Tesco took a roll [a cut] off the top. The worst case was in 2010 when the weather in Southern Spain was so bad that salad produce was very short.

‘We could not supply aubergines for two weeks and the result was Tesco fined us £45,000 for loss of profit.

‘We declined the fine and said we would not pay, they promptly took the money from our account that they owed us.

‘At the end of 2011 I retired, but I felt that the Tesco bubble was starting to burst. Suppliers could not go on supplying like this.

‘It had become impossible to service Tesco with all these add-on costs and demands.’

A Tesco spokesman said: ‘We did not have the opportunity to examine and respond to these complaints in detail. We value our relationships with suppliers. They are fundamental to the service we offer our customers and we are committed to ensuring that those relationships are based on mutual benefit.’

The reality is that most of the grocers strike similar deals with suppliers. Lewis will reveal tomorrow whether the firm went beyond what most would deem to be normal.

COMMENTS

The comments below have not been moderated.

Old Chap, Caribbean, Grenada, 1 week ago
Wow - an interesting article about corporate bullying at it's worst. Tesco's needed this correction, to get rid of the old stale and greedy bosses and their tactics, and establish a new start. I trust that a new slimmer, smarter and more honest company emerges from this debacle, and look forward to it.

Retired Oldie, London, 1 week ago
As a supplier to Tesco in Poland I can confirm all their practices set out in the article. We supplied baby and children's clothes. The buyer chose the products and then told us how many of each article we had to supply. We once warned a buyer that in our view a product chosen would not sell in the quantities she required. When we were proved correct all Tesco did was to tell us to take them back!. In the end we told Tesco that we would no longer sell any of our products to them. Other suppliers we knew who also supplied Tesco had the same experiences. These practices are not exclusive to Tesco. It is right across the board with Makro Cash & Carry, Auchan, Real, to name but a few all following the same practices

Ratcatcher, Westminster Sewers, 1 week ago
Perhaps you would prefer the French model. Suppliers there formed co-operatives and tell the supermarkets what they will pay. The result? Poor quality food, meat that costs 45£ for a small joint of 2nd quality beef. Bread that is usually sold stale. Milk that may or may not arrive in the supermarkets 5 days after Christmas. Thank your lucky stars you have Tesco, Sainsbury and the others, because Lidl and Aldi are also too expensive by British standards ,in France. If you had to pay French Aldi and Lidl prices the majority of Brits would have a heart attack.

Rich, Swansea, 1 week ago
In fairness, i shopped at the co-op yesterday. First time in years as I find them expensive. However, so many discounts. I'll go there again.

robert, kent, United Kingdom, 1 week ago
I am no fan of Tesco's but this is very slanted reporting. Very cursory examination of this supplier shows that its problems lay elsewhere and as your article reports its failure was nothing to do with Tesco. As a consumer I expect a supermarket to deliver goods at best quality and best price. Suppliers to supermarkets have enjoyed substantial growth of business through the good times (indeed some produce businesses have been successfully built solely on the back of "tied" supply contracts with supermarkets) and should expect to be "squeezed" just as consumers and supermarkets are in this new economic environment.

Maya Az, york, United Kingdom, 1 week ago
I agree with you.As a supplier Tesco have forced many british companies to shut down !!!

Maya Az, york, United Kingdom, 1 week ago
Tesco have ripped off british suppliers thats truth.Tescos downfall Article is bag on for its money !!!

Adam1, sheffield, United Kingdom, 1 week ago
The media have definately got the daggers out for the big supermarkets and Tesco seem to be in the firing line constantly. Aldi and Lidl are pretty poor in comparison but all they get is praise and free advertising.

Russell, colchester, United Kingdom, 1 week ago
The suppliers have only one problem an that's themselves .........What they should do is organize themselves form a consortium and blacklist supermarkets that don't stick to honest trading it's their produce and it's them that should dictate terms simply by withholding their goods fresh produce is the life blood of supermarkets and the threat of empty shelves will soon bring them to their senses.

INVESTMENT EXTRA: Bargain hunters are itching to pile into Tesco shares - but has the stock bottomed out?
By RUPERT STEINER FOR THE DAILY MAIL
PUBLISHED: 21:55, 31 October 2014 | UPDATED: 16:05, 1 November 2014

At Tesco, it is not just bread and milk that are going on the cheap. Shares in Britain’s biggest retailer have fallen faster than the acceleration on Phil Clarke’s Ferrari.

The former chief executive had presided over an avalanche of bad news, halving the retailer’s market value to £14bn over the past year.

A string of profit warnings, the inflation of its profits by £263m, and the suspension of eight executives pending the results of a Serious Fraud Office investigation, have all contrived to send the shares falling from more than 300p to 173.6p in six months.



But it needn’t be bad news for everyone. Bargain hunters looking to cash in on the woes of the troubled grocer are itching to pile into the stock when it bottoms out.

But the big question is: has it reached its low?

Clarke’s replacement, Dave Lewis, did his best to ‘kitchen sink’ the business last week, announcing as much bad news as possible and posting a 91 per cent fall in half-year pre-tax profits. But the gamble is whether there are more skeletons to come, the potential impact of the fraud inquiry, and macro issues affecting the industry as a whole.

The key point is, despite all the doom and gloom, Tesco is no Woolworths or HMV. It is not on its last legs, still makes a profit some retailers would kill for, and the sum of its parts are worth more than the whole. Its business in Thailand would have a £4bn price tag if it was sold to bolster the balance sheet. Eastern Europe has a value of £2.2bn, Tesco Bank £2bn and the Dunnhumby unit, which runs Tesco’s Clubcard loyalty scheme that crunches customer data, £2bn.

It arguably is top of the list of disposals, having proven useless at helping Tesco spot changing shopper habits.

Either Clarke and his team failed to interpret the data that showed a shift away from large hypermarkets to smaller convenience stores or the quality of the data captured is just plain poor. But investors willing to ride out the storm over the longer term will benefit from an eventual uplift.

Dave McCarthy, an analyst at HSBC, said: ‘Tesco has been going wrong for six years or more, and it could take as long to put things right as it took to go wrong.

‘We think Tesco could emerge as the long-term winner among the quoted sector and should be able to take the fight to the discounters.’

Look back to the length of time Sainsbury’s took to recover back in 2004, and prior to that in the 1970s when Tesco was last in trouble and Lord MacLaurin improved its fortunes. We are talking as long as eight years. For those short-term opportunists it is a different story – steer clear of Tesco, there is more pain to come.

First, the SFO investigation could rumble on for years, distracting management and affecting morale. As it is, eight senior managers have been suspended, so the executives drafted in to take their place are all inexperienced in their roles, along with Lewis, who has been in position for seven weeks. Then there are the unknown legal costs involved with the alleged fraud, potential fines and law suits.

Besides Tesco-specific issues, short-term investors will also need to bear in mind there are macro issues affecting the whole sector.

Discounters Aldi and Lidl have sparked a price war so profit margins are being squeezed, and even strong players such as Sainsbury’s are suffering. Hard up consumers are spending less and shopping habits have changed – marking a shift to smaller convenience stores and online shopping.

This is the point where financial metrics would show when Tesco is on the mend.

But with a retailer as accessible as Tesco, the best measure is to swap an investor’s hat for that of a consumer and walk inside a store.

Trevor Green, head of UK institutional funds for Aviva Investors, says: ‘My advice is: in six months’ time, go inside a store and see if there is a noticeable difference.

‘If there is, and this is borne out by an increase in market share, invest.’

Tesco suppliers launch internal health-checks on figures in wake of financial scandal engulfing supermarket
By RUPERT STEINER FOR THE DAILY MAIL
PUBLISHED: 01:03, 29 October 2014 | UPDATED: 08:14, 29 October 2014

Several of Tesco’s biggest suppliers have launched internal audits to ensure their figures have not been distorted as part of the financial scandal engulfing Britain’s biggest retailer.

Magnum Ice Cream maker Unilever, Nurofen owner Reckitt Benckiser and Procter & Gamble, which makes Pampers nappies, have all started separate inquiries.

They want to verify their own accounts are accurate and their income and costs relate to correct periods after Tesco pulled forward payments from suppliers and pushed back bills to inflate its profits by £263m.

Troubled times: Tesco is being investigated by City watchdog, the Financial Conduct Authority, over allegations it cooked the books



Troubled times: Tesco is being investigated by City watchdog, the Financial Conduct Authority, over allegations it cooked the books

The retailer is being investigated by City watchdog, the Financial Conduct Authority, over allegations it cooked the books.

The Serious Fraud Office is also watching the situation closely and Tesco has suspended eight senior executives.

Unilever insisted it was conducting due diligence rather than an audit: ‘We are doing due diligence checks, as you’d rightly expect us to whenever there are external circumstances such as these.’

The Anglo-Dutch firm is one of Tesco’s biggest suppliers, making items as diverse as Marmite, Lipton Tea and Persil. It did not say when it expected the checks to be complete.

Healthcare and cleaning firm Reckitt Benckiser – which is Tesco’s eighth biggest supplier – is less exposed because the accounting crisis is thought to centre around food.

The Durex-to-Cillit Bang maker has been checking whether it has been ‘comfortable with its accounting’ and said: ‘As you would expect we have done our due diligence.’

Daz detergent and Fairy Liquid maker Procter & Gamble also confirmed it has embarked on a similar review.

The unprecedented steps taken by Tesco’s biggest suppliers have been sparked by how the grocer books profits in its accounts.

For decades, big suppliers have paid supermarkets to help fund promotions to shift more of their goods.

This can mean they contribute to advertising campaigns on television and in newspapers, or they might fund a special display in shops.

Sometimes, when items are discounted, say from £9 to £5, it is the suppliers that pay the £4 difference. On top of this, suppliers also pay supermarkets fees to place their items in the best positions on the shelves.

Supermarkets also contribute to the promotions, so there is a transfer of funds backwards and forwards between supplier and grocer.

IAS (International Accounting Standard) 18 spells out rules on when firms are allowed to book a profit on these deals with suppliers.

Tesco (up 0.7p to 169.8p) appears to have bought more time making its figures look better than they were by including supplier contributions that depended on it hitting sales targets that had not been met.

The allegation is that it persuaded suppliers to make these contributions even though they had not been triggered, in exchange for future benefits such as cash back in the future.

The concern is that in order for Tesco to have inflated its profits, even temporarily, the flip side is there will be a black hole wherever the sums came from. It is not known which suppliers are implicated. Unilever, Reckitt Benckiser and Procter & Gamble have been quick to perform internal health checks, but there is no suggestion that they are involved in any wrongdoing.

Other big suppliers including Coca-Cola, Kellogg’s and Dairy Milk-maker Mondelez refused to comment.

And nothing to do with you Mr Leahy -


Leahy: Tesco lost its way — but the worst could be over


http://www.thesundaytimes.co.uk/sto/business/Retail_and_leisure/article1478591.ece

The Guardian has something similar:

Tesco has stopped focusing on what it does well, says Sir Terry Leahy
Supermarket’s former chief executive says it has lost touch with loyal customers, but that it may see some respite as the economy improves
Shane Hickey
The Guardian, Sunday 2 November 2014 14.53 GMT

Tesco is 'a very big brand in the centre of the market', said Sir Terry Leahy.

The former chief executive of Tesco, Sir Terry Leahy, has said the troubled supermarket has drifted away from its core business and lost contact with its loyal customer base.

Leahy said the company had “focused too much on what it isn’t, rather than remembering what it is”. However, he added that Tesco and its three main competitors may soon see some respite as the economy improves.

“What it is is a very big brand in the centre of the market, and clearly if you’re weak in the centre you can get attacked from all sides,” he said in comments made during a conference call organised by Bank of America Merrill Lynch, reported by the Sunday Times. “But if you’re strong in the centre and doing what you do well, it’s a good place to be – you can attract customers from all parts of the market.”

Leahy took over as chief executive of Tesco in 1997 and left in 2011 after a stewardship that garnered him a reputation as one of Britain’s most successful businessmen. Despite Tesco’s dominant performance during his reign, Leahy’s legacy has been criticised by his predecessor and mentor, Lord MacLaurin, who described a failed attempt to break the US market as “disastrous”.

Leahy was succeed by Philip Clarke, who resigned from his position in July after failing to halt a slide in sales and profits.

Last week the ratings agency Moody’s said the supermarket could see its debt downgraded to junk unless it outlines plans to cut borrowing and improve trading. In September a £263m accounting hole was discovered which resulted in the suspension of eight senior members of staff. The Serious Fraud Office has launched an investigation into the matter. Last month Tesco’s chairman, Sir Richard Broadbent, said he was stepping down, as the retailer announced a 92% slump in first-half profits.

Leahy said during the conference call that the four main supermarkets – Tesco, Asda, Morrisons and Sainsbury’s – “may have seen the worst” during a period when discount supermarkets such as Aldi and Lidl have been making gains. He said the economy would now provide a “more favourable backdrop” for the supermarkets and that the discounters’ growth may slow.

“You may start to see a situation where the hugely disruptive effect of poorer consumers and [discount] competitors starts to be accommodated by the main players and they start to respond to it,” he said.

Philip Clarke was replaced by Dave Lewis, the head of Unilever’s personal care business. Leahy told those on the call that they “may be surprised how quickly you could see signs of improvement in [Tesco]. It’s very responsive to the right leadership and the right marketing strategy”.

Leahy said the new chief executive had “emphasised the need to focus on customers” and that the company worked best when it followed trends and focused on consumer behaviour.

A spokesperson for Tesco refused to comment on the remarks by the former chief executive. Leahy could not be contacted.

Exec Line, I hope in the next few days he gets slated from Ian MacLaurin, as he has on several occasions in the past. What a load old toffee above , Tesco have never talked to customers in years since the old man died. He would be out on the shop floors asking customers what they thought etc.

sharecast =Tesco is considering selling a stake in its bank business as part of a plan to raise billions of pounds of capital, the Sunday Telegraph reported. The supermarket group is in the early stages of looking at a partial float of Tesco Bank to raise between £500m and £1bn. Analysts now expect Tesco to raise lots of cash to turn round its ailing business. Options include selling or floating the bank, spinning off its Asian business and selling Dunnhumby, the unit behind its Clubcard loyalty programme.
Tesco has lost its identity and connection with customers, but the big supermarkets may be past the worst of their troubles, Tesco's former Chief Executive Sir Terry Leahy said. The Sunday Times reported that Leahy made his comments on a conference call for Bank of America Merrill Lynch clients. Leahy, who left Tesco in 2011 and chairs B&M, said with oil prices falling and real wage growth on the way back, market conditions for the large grocers could ease. Tesco might surprise the industry with the speed of its recovery under new boss Dave Lewis, he added.

Whatever he City may think, we have yet to discover the aftermath of so-called watchdogs of finances, ( Which may have been dozing for years and will maybe need some catch-up and PR, to achieve Public Confidence ).

-And what a pity these same/similar bodies weren't able to exercise inspection for Banks, some might add-

Then TESCO has the spectre of Public confidence to contend with - loyal customers will continue to shop there, because it's near where they travel/live/etc.

...If they sell-off their other "non-core" ( city=speak for "It's not a fire-sale"), businesses - will the cash be worth the loss? I suspect not, but Execs are only interested in short-term figures and if they can maintain the Dividend, that may help to keep Investors from staying away....

And thirdly, it seems the likes of Lidl/Aldi ( and Morrisons, too if their TV ads are true) are seen as "Better value" and certainly Lidl do have many cheaper products which appear to be close/equal in quality.

So as I see it, there are THREE points against Tesco . . . and only one ( the Local-Loyal customers) - but that good-point was always present....and Tesco needs to address those THREE . . . . and whilst "time" will help, I don't see the figures ever getting back to where they were prior to this recent "revelation".

That's not say that speculators can't make money ( don't they always?), but in the long-term the truth will always carry the most weight . . . and I don't see [TSCO] sp returning to £4 for quite a while yet.
Currently 173p

Interesting to see Sains booking a one-off impairment charge of £628m on the value of existing stores and the cost of mothballing 40 proposed developments. The value of Tesco stores has come under the microscope.

Sharecast -


'Big Four' supermarkets could face closures, Waitrose boss warns

Sun, 16 November 2014


UK supermarkets Tesco, Morrisons, Asda and Sainsbury could be forced to close some of their stores, Waitrose chief Mark Price has warned.
Price, who has been notably vocal about the current picture on the grocery market in recent times, said it would be "incredibly hard to call" whether the 'big four' supermarkets would survive the difficulties facing the sector.

Traditional retailers have struggled to keep up with the growing popularity of discount supermarkets such as Aldi and Lidl, which have both dramatically increased their market share as that of the big four has dwindled.

Speaking in an interview with the Telegraph at a Waitrose store in Salisbury, Price said: "This is as fundamental as supermarkets coming into the UK in the 1950s and reinventing what food shopping was all about.

"I think we are at one of those inflection points where customers are acting differently and retailers are going to have to respond to it.

"Look at B&Q. Look at Homebase. I think that food is probably four or five years behind non-food. What you have seen over the last five years is 12% of non-food space taken out of the market. "You have had no food space retired over that period.

"In fact what you have been seeing is food space growing by 3-5%. So, more and more space has been added at a time before you get the impact of internet, convenience shopping and all the other shifts that we talked about."

Tesco’s China stores a drag on its partner

http://www.standard.co.uk/business/business-news/tescos-china-stores-a-drag-on-its-partner-9860797.html

I understand that all Supermarket woes are down to Lidl and Aldi - Phew, I wonder how these tiddlers cope?
Fact is they don't need to...the Supermarkets have chosen to blame the newcomers ( and some turnover may have slipped their way, but it's been gradual, so will already be old-news ). What supermarkets haven't noticed is that folks aren't buying things they don't need.
I believe this is why their TO is slipping....Folks are buying only the basics, so more Stuff is not selling like it used to and TO suffers ( because these are more-expensive items ).
It would be interesting for Tesco (say) to break-down their sales by department AND by spend - - - whereas folks might still buy light-bulbs, extension leads, etc. they probably don't need another big Telly.
Morrison is claiming it price-matches Aldi ( DYOR ), so that's a bad line to take when Morrison's store-costs are so much higher. I expect Tesco and others may follow suit. which is good for consumers, but BAD if your local Tesco closes and you have no car.
Another reason for poor performance may be the free-delivery offered for On-Line orders . . . .
TSCO today 192p, just a tad up from recent low.

Tesco leads sales falls in the last three months, Nielsen says

Fri, 21 November 2014


Ailing supermarket group Tesco came out at the wrong end of another set of sales data on the UK's food retailers on Friday.


http://sharecast.com/news/tesco-leads-sales-falls-in-the-last-three-months-nielsen-says/22251131.html

Blackrock > 5%

I agree with hangon ( 17 Nov )

It is said that Aldi and Lidl are taking business from Tesco - doubt that is the story.
If you have been in either of those two stores, you see goods in baskets disarranged
by customers and out of boxes etc, and they offer only a fraction of the commodities offered by clean looking Tesco and Morrisons.

It is probably more fundamental that sales are not increasing, and that
punters / customers do not have the spending power of late.
Look at M &S they are in a similar situation and we do not say they are being
undercut by Aldi and Lidl.

Maybe the big supermarkets are now essentially ex growth.
They may need to expand more abroad, by buying up other operators ?

Disagree, Tesco is losing market share and about a million shoppers a week to the discount stores. Why do you think that the likes of Tesco and Sainsbury are going to have to close stores in the future . This is down to a drastic drop in shoppers through the doors.

Lidl's are just about to open a massive new super store about a mile away from me in Bedfordshire,it was ultra busy before the old store closed 3 months ago,this new Lidl store will certain take a massive amount of folks from the local Tesco and Sainsburys.

The food that you can buy in these discount supermarket is of the highest quality but at a much lower price,the big 4 food retailers that we have all shopped at for decades in my opinion are 'have beens',the change has just started and it will only get worse for the big 4.

Will some merge or close i dont have a answer for that one,but the way that things are going with the interent is it possible that stores will close and we do all our weekly shopping online and then a van arrives at our front door,i think that is a great possibility as its all ready gathering momentum.

The big stores that they have currently could close down and turned into housing estates as all they would need in theory are warehouses and the odd small shop.

Lidl and Aldi came to Britain in the early 90's. The Uk supermarkets have just sat and watched them for 24 odd years.

Online/delivery - you have to ask why Aldi and the likes have avoided this service to date.
Tesco charge a delivery cost but nothing like the £20 true cost to deliver to your door.
There are pickers, to select your order, driver wages, chilled van costs/fuel. Vast overheads. Discount stores are growing turnover at twice the rate online shopping is growing. So you have to ask why are they still so keen to push online shopping. Great for the customer but for every store shopper that switches to home delivery, the store customer is picking up the overheads in their shopping purchases. Will Tesco ditch this service ? I just wonder if one supermarket does, will they all follow. Just as one supermarket delivered first and they all followed like sheep. Aldi clearly sees customers prefer to shop in a smaller store and for the huge cost saving are prepared to pick their own shopping up. I see home delivery being ditched especially if customer head counts still drop in stores as the overheads will be impossible to meet.

Tesco property time bomb
By Trader Talk
November 22 2014, 7:00am

Competition from fast-growing German discounters Lidl and Aldi have sparked a price war, chipping away at the market share of their bigger competitors. Market leader Tesco (Epic: TSCO) is bearing the brunt, with sales falling 3.7% in the period, while Lidl and Aldi added 16.8% and 25.5% respectively. Tesco’s overall market share is down to 28.7% from almost 30% 12 months ago.

It is also becoming harder to value these businesses, with the value of assets underpinning the shares falling, little clarity on future profitability and dividends being cut. Investors have often talked about the assets of the UK supermarkets supporting the valuation, with the value of Tesco property said to be worth £21 billion, over 30% more than the market capitalisation.

Yet there are growing concerns over the quality of those assets, with the gap between the performance of large out-of-town stores and convenience stores widening, undermining the value of these out-of-town warehouses. Sainsbury’s recently took a charge of £663 million related to its property portfolio, while some analysts argue that Tesco’s assets could be worth less than half the book value indicated on the balance sheet.

Tesco still trades on a relatively full 12x prospective earnings, although falling revenues, profits and a failure to issue full-year profit guidance makes it hard to value the business. Tesco’s interim results on 23rd October showed net profit fell to £6 million in the six months to 23rd August, compared with £820 million in the same period last year, while revenue dropped 4.5% to £30.47 billion.

The groups pension deficit ballooned by £800 million since February to £3.4 billion, squeezed by declining returns on corporate debt. Meanwhile, the interim dividend has already been slashed by 75% and management are expected to cut the final by a similar amount, leaving an annual yield of 2.5%.







The chart of Tesco illustrates the 18-month downtrend, with the 50-day moving average providing resistance to any spikes. After rallying 15% in the past month, the shares appear to have run out of steam, with the bearish divergence evident from the declining oscillators, indicating the underlying momentum is fading.

Tesco has fallen a long way, but with margins under pressure, assets vulnerable to write-downs and an ongoing investigation by the serious fraud office for fiddling its accounts, leaves Tesco susceptible to further weakness.

At the time of writing the share price is 194.0p and the downward momentum suggests trading short. Near term targets are seen at 186.25p, 177.5p and 167.8p, while a stop-loss above resistance at 201.75p could be used to minimise risk





http://www.proactiveinvestors.co.uk/columns/trader-talk/17361/tesco-property-time-bomb-17361.html