Tesco to increase price investment to turnaround declining sales

Tesco is planning to increase its investment in price this year to mitigate the threat of the discount grocery retailers and help reverse a sales decline at its UK business and the second consecutive year of profit falls.

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Tesco is to increase its price investment having already cut the price of staple items such as vegetables and milk by an average of 24 per cent.

For the year ended 22 February, Tesco says sales at stores open for more than a year fell by 1.3 per cent, with that number rising to 3 per cent in the last quarter, the fastest decline since Philip Clarke took over as chief executive three years ago. Total sales were up 0.9 per cent, while underlying pre-tax profits declined for the second year in a row by 6.9 per cent to £3.1bn.

Tesco announced a £200m price investment in February and says it has already brought down the cost of staple items such as milk, eggs, chicken and vegetables by an average of 24 per cent. However, since then, rivals have also announced plans to invest in price, with Morrisons planning to spend £1bn over the next three years.

Speaking on a press call this morning, Clarke said the supermarket is “committed” to seeing prices across a range of products come down. He says the £200m figure is “just the start”, although he wouldn’t be drawn on how much Tesco might spend in total, saying it would be “reckless” to offer another number.

“We have already reduced the price of a large number of products that really matter on an every day low prices basis and you will see more of than in a minute. We have a big and bold plan,” he added.

He said the increased investment forms part of wider plans to ward off the threat of the discount chains Aldi and Lidl, claiming Tesco needs to be close in pricing on lines that matter to customers in order to compete. However, he highlights that Tesco won’t beat the discounters on price, pointing out that whenever the big four drop their prices the discount stores cut them further, meaning Tesco needs to differentiate in other ways, in particular by making use of its Clubcard loyalty scheme.

It has already launched its FuelSave scheme, offering customers up to 20p off a litre of fuel when they collect Clubcard points, and is trialling a digital coupons app in Plymouth as another step in plans to launch a digital Clubard as part of its multichannel focus. Tesco’s long-awaited current account will also be available in the summer through Tesco Bank. It will link to Clubcard and offer points whenever shoppers spend.

Tesco has previously admitted it needs to “go faster” in administering its turnaround strategy, with Clarke saying the grocery industry is “changing more rapidly than ever before”. It plans to refit 650 stores over the next year, including 110 of its largest Extra stores, with many getting a Giraffe or Decks restaurant.

Clark said that in stores that have already been revamped, sales are up by between 3 per cent and 5 per cent and margins also increased. Tesco is also reducing the size of some stores by up to a fifth to take account of changing shopping habits and will open 150 more convenience stores, as well as refresh a further 450, next year.

However, analysts warn that Tesco is rapidly losing ground, particularly to the discounters that continue to see double-digit growth in a trading environment that the big four call “tough”. Phil Dorrell, director of retail consultancy Retail Remedy, blames Tesco’s confusing marketing message, which is failing to get across either Tesco’s new pricing or its points of differentiation.

“The discounters are drawing in new customers with great prices, surprising ranges and super quality. Their proposition is simple and delivered almost effortlessly. They have an energy and a drive that Tesco has lost.

“Tesco’s marketing is still flat, not to mention confused. There’s an uncertainty about whether to deliver an aspiration theme or a price theme. The results is neither is being delivered,” he adds.

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