UK: Tesco overshadowed by Sainsbury as grocery battle escalates

Tesco Plc (TSCO), the U.K.’s largest supermarket company, may report the first signs of a recovery in domestic sales next week, though its progress is likely to be outshone by the superior performance of J Sainsbury (SBRY) Plc.

While Tesco may say it almost halted four quarters of decline in U.K. same-store sales, Sainsbury will probably report an extension of an unbroken growth record that stretches back to 2005, according to analyst estimates compiled by Bloomberg. Both companies are scheduled to report on Oct. 3.

As Tesco is trying to win back customers disillusioned by the level of service, stores and food quality, Sainsbury is maintaining a push that has seen it increase share of the grocery market by more than 1 percentage point to 16.5 percent over the last eight years. Sainsbury’s upscale and budget ranges have better suited customers seeking discounts, while at the same time wanting to treat themselves.

“Tesco can’t change consumer perceptions overnight,” said Natalie Berg, an analyst at Planet Retail in London said. The Cheshunt, England-based grocer “has been focusing so much on delivering value they have neglected the fact people are still looking for little luxuries when they walk into a supermarket.”

In an effort to halt Tesco’s decline, Chief Executive Officer Philip Clarke has introduced money-off coupons, revamped the Everyday Value line of budget foods, increased staffing and begun a program of store makeovers. He plans to spend 1 billion pounds ($1.6 billion) this year on improving the business.

Tesco may say U.K. sales at stores open at least a year at fell 0.1 percent in the fiscal second quarter, according to the average estimate of 10 analysts compiled by Bloomberg, compared with a drop of 1.5 percent in the previous three-month period.
Share Underperformance

It may take “a good 18 months before we see a meaningful turnaround,” according to Berg.

“You don’t just improve stores and standards and instantly expect to win back customers,” said James Collins, an analyst at Deutsche Bank AG in London with a buy recommendation on Tesco. “It takes time for people to change their habits.”

Shares of Tesco, which in January lowered profit guidance for the first time in 20 years, have fallen 17 percent this year, while Sainsbury has gained 15 percent.

Same-store sales at Sainsbury probably gained 1.3 percent in its fiscal second quarter, the estimates show, little changed from the previous quarter’s 1.4 percent growth.

Sainsbury, which sponsored the London Paralympic Games this summer, has been buoyed by its Brand Match campaign, which promises shoppers their basket will cost the same as rivals or they receive a coupon at the till with the difference.
‘Broader Audience’

The Brand Match strategy and promotions “have opened the retailer up to a broader audience through improvements in price perceptions,” according to Richard Cathcart, an analyst at Espirito Santo with a neutral recommendation on the stock.

Tesco hasn’t been losing out just to Sainsbury. Discounters such as Aldi and Lidl and the upscale Waitrose chain have also added to their share, while Wal-Mart Stores Inc.’s Asda has used its Price Guarantee campaign to win shoppers.

Tesco’s share of the U.K. grocery market fell to a near seven-year low of 29.7 percent earlier this year, before rebounding to 30.8 percent in the 12 weeks ended Sept. 2, according to researcher Kantar Worldpanel.

For Tesco, the crucial part of next week’s report “is second-quarter evidence of better U.K. relative sales performance,” said James Grzinic, an analyst at Jefferies International in London. While “major vouchering activity” has helped, “we expect Tesco to flag that in-store improvements are delivering a much enhanced customer experience.”

Tesco has only revamped about 100 of its more than 2,900 U.K. stores so far, while the number of hours worked by staff each week has increased by 300,000 since April.

The grocer surprised investors in January when it said it expected “minimal” growth in group trading profit this year. It may say next week that earnings on that basis fell to 1.62 billion pounds in the first half, according to the median estimate of 12 analysts compiled by Bloomberg.

Among the reasons for the decline in earnings will be a restriction of Sunday trading hours in South Korea, Tesco’s second-largest market after the U.K., according to Nick Coulter, an analyst at Nomura. Coulter also cited “stability as opposed to growth” at Tesco Bank, where the retailer has pushed back the introduction of so-called current accounts, as well as “a more measured recovery profile” at the U.S. Fresh & Easy chain.


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