TESCO ISSUED its first profit warning in living memory yesterday, sending shares in British grocers tumbling on fears the world’s third-biggest retailer would launch a price war to fight back from its worst Christmas in decades.
The warning, which prompted the biggest one-day fall in Tesco shares since 1988, raised the spectre of a drop in profitability for the industry as a whole and threatens the cash engine that drives the company’s overseas expansion.
Chief executive Phil Clarke said operating profit in 2012/13 would be flat, compared with forecasts for a 10 per cent rise, as Tesco, previously one of corporate Britain’s most consistent growth stories, invested hundreds of millions of pounds in fixing what he described as “long-standing” problems in its home market.
“We’ve driven productivity a bit too hard is the truth. We’ve run too hot for too long, and that’s affecting most aspects of our shopping trip, and that’s got to get better,” he said.
Tesco will invest in staff and better products as well as continuing a price-cutting campaign launched in September.
It will cut back openings of big hypermarkets, the key to its conquest of Britain’s retail sector in the 1990s, and focus on faster-growing smaller stores and the internet, he said.
“This is the first time that Tesco is deliberately taking profit margins lower that we can remember . . . with the likely outcome a reduction in industry profitability,” Espirito Santo analyst Caroline Gulliver said.
Shares in Tesco plunged as much as 16 per cent to a 33-month low of 324.25 pence, wiping £4.8 billion pounds (€5.7 billion) off its stock market value. Rivals J Sainsbury and Wm Morrison also fell over 5 per cent.
Analysts welcomed the drive to improve Tesco’s British performance, which started to falter in the last years of long-standing chief executive Terry Leahy and has continued to lag its main competitors since Clarke took over in March 2011.
Panmure’s Philip Dorgan said the stakes could not be higher, as weakness in Britain could undermine Tesco’s expansion in faster-growing markets such as China and eastern Europe.
“This is the nightmare scenario,” he said, slashing his pretax profit forecasts by 15 per cent for 2012-13 and 2013-14.
“If the UK’s profits keep falling, then it will not be able to invest so much overseas, so long-term growth will slow and returns will significantly undershoot targets.”
Tesco’s warning was accompanied by a raft of weak trading updates from British store groups including Home Retail-owned Argos, bicycles-to-carparts group Halfords and Mothercare, underscoring how cash-strapped Britons have been cutting back spending on non-essentials.
“It is not what I wanted for Christmas,” Mr Clarke said.
Tesco’s problems were partly due to the pressure on British shoppers, he told reporters on a conference call.
The group sells a higher proportion of discretionary non-food goods such as clothing and electrical items than rivals such as Morrison and Sainsbury, both of which reported small rises in underlying Christmas sales.
“It is going to be broadly the same (as in 2011). I cannot see it being any better,” Clarke said of the consumer outlook.
Some of Tesco’s disappointing sales performance was also due to its “big price drop” campaign in September, he added. While this attracted extra customers, it had not yet tempted enough to offset the drop in takings.
Tesco also suffered from promotions and couponing by rivals, Mr Clarke said, questioning whether some of them would see much benefit to profit from rising sales.
