Markets expect Tesco to disappoint

The two pronged issues of margins being squeezed and market share erosion look set to ensure that Tesco paints its gloomiest picture in a decade when it reports on Wednesday.

Before I list all the issues that Tesco is facing, it is worth trying to ensure we put everything into some sort of context. It has the largest market share of any food retailer in the UK and this dominance is even more exaggerated when we look at the company’s share of online sales. These two statistics alone outline why all of its competitors would gladly swap positions.

The last decade has seen Tesco enjoy unprecedented success as it has set higher and higher benchmarks. The last couple of years have been marred by the failure of the Tesco board to replicate the successful UK template overseas. The unmitigated disaster of the company’s Fresh & Easy chain in the US highlights how difficult the board has found overseas expansion.

The larger issue facing today’s board is the price war UK-based food retailers have to maintain their market share. The success that smaller chains like Aldi and Lidl have had chipping away at the big four retailers, has seen all cut costs to the underlying retailer. Tesco has enjoyed a healthy profits margin for some time but suppliers have already taken as much of the burden as they can manage. This leaves the profit margin as the only place still to cut, which will ultimately hit the bottom line directly.

Markets have already been discounting the shares ahead of Wednesday’s figures, but a fresh bout of awful press headlines could squeeze shares a little lower before support is found. The May 2012 lows, just below 300p, should offer a little support in the medium term.    

Tesco chart

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.

Find articles by analysts