Tesco faces tough questions

As its shares sit slumped at 10-year lows, Tesco’s chief executive officer Philip Clarke will face some tough questions as he releases the company’s latest figures.

The good news is that Tesco has maintained its hold of the biggest market share in the UK food retailing arena, and also makes profits in the billions. The bad news is its market share has been eaten away by the other big four retailers and in the last six months, a number of the minor players have begun to see major improvements too.

The last quarter saw Aldi grow its market share by 35.3% and Lidl by 17.2%. Following these figures, Aldi now has a market share of 4.6% and is closing in on Waitrose who hold a 5% share. This highlights the growing shift in consumer spending, following years of stagnated consumer earnings, along with an ever increasing inflation rate.

Consumers look set to enjoy a price war, as the bloated profit margins that many firms have enjoyed could possibly be slashed. Morrisons, in a desperate bid to improve its market share, has promised to cut £1 billion from the price of goods sold. Tesco has responded with cuts of £200 million to its grocery goods. Where one goes the others are sure to follow, and it’s only a matter of time before we see all of the food retailers chopping prices.

Fundamentally, Tesco stands accused of dropping the ball because of its focus on overseas growth at the expense of its UK market obligations. It is suffering from both a reducing market share and cuts to its profit margins. Wednesday’s press conference will see Philip Clarke face some tricky questions and so far, the markets have not seen enough to be totally convinced he has the answers.

The share price has already factored in falling profits, squeezed profit margins and has moved into oversold territory on the 10-day relative strength index. If the shares see a close below last week’s low, we could see the shares drop down to the 260p region before support reappears.

Tesco chart

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