Tesco Questions Out-of-Town Commercial Property Developments after Fall in Sales

Posted on 21 January, 2012 by Neil Bird

The news that the UK’s biggest supermarket chain has issued a profit warning has caused shockwaves on the stock market. Tesco, which has 2,700 retail commercial properties in Britain, made the announcement after reporting its worst Christmas trading period for 20 years. The worse than expected figures came despite an expensive discounting scheme and resulted in the biggest fall in its share price since Black Monday in 1987. The company is now revamping its stores and being urged to review staffing levels in a bid to halt this alarming slide.

Tesco has enjoyed two decades of unbroken dominance of the UK grocery market. In that period it has pioneered store loyalty cards and increased its customer base with cost cutting marketing campaigns. Over the same period Tesco has led the way in the move from the high street towards out of town commercial property developments. Since the 1990s the supermarket has opened around 200 of these megastores and become one of the biggest private sector employers.

The news that the retail giant has experienced a poor Christmas comes amid a flurry of results from other retailers which fail to present a clear picture of the current state of the market. While many report a year on year fall in sales, others experienced a better than expected festive period. Sainsbury’s, for example, reports its best December for years with like for like sales up by 1.2%.

This will only add to the current gloom surrounding Tesco, which reports a fall in sales of 2.3%. The news alarmed investors and saw the retailer’s share price drop by 16%, wiping more than £3 million off its value. Tesco has also seen its market share fall from 30.5% to 30.1% over the past year, as customers have increasingly turned towards rivals such as Waitrose and Morrison’s.

The Christmas sales slump came despite Tesco’s £500 million ‘Big Price Drop’ campaign which many analysts have now dubbed the ‘Big Price Flop’. Richard Hunter of Lansdown Stockbrokers, told the Evening Standard; “Unfortunately the Big Price Drop reported in this update will be remembered as more reflective of the share price than the campaign.” Tesco Chief Executive, Philip Clarke denies that the campaign has been a failure but concedes: “We could have done a better job communicating it.”

Tesco is now involved in a revamp of its store’s in a bid to win back customers. The refurbishment was piloted in a small number of branches before being rolled out to a further 200 over the past couple of months.  However, retail analysts believe that Tesco stores have suffered due to staffing cuts as much as anything else.

The number of full- time staff in commercial property developments over 40,000 sq ft has fallen from 275 to 226 recently and this has had an adverse effect on the customer, they argue. Bryan Roberts of Kantar Retail, says they may have cut too much from store budgets and service has declined as a result. “Shopping doesn’t have to be a traumatic ordeal,” he says.

At the same time, the development of further out-of town stores has been questioned by Philip Clarke himself who suggests that Tesco is uncertain if this remains the way forward for retail. Admitting that they are now “less of a potent force,” he may be signalling a change in strategy. Whatever Tesco decides to do to improve its performance, the company’s current difficulties should be put into perspective. Despite the fall in sales over Christmas Tesco still made an annual profit of £3.7 billion.

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