April 22, 2015, by Charlotte Anscombe

The taming of the beast – Professor Wyn Morgan looks at the reasons behind Tesco’s profit fall

Tesco’s reported loss of over £6bn has exemplified the significant changes that have occurred in recent years for the company and for retailing as a whole. Tesco has been seen as a behemoth in retailing: growing market share at the expense of its rivals especially post the introduction of the Tesco Clubcard. Even the recession hardly seemed to affect the company and yet, a few years later, the news of its dramatic and significant loss is remarkable.

Two key factors are at play, which are generic to the retail sector but affect firms differently. The first is the changing nature of consumer behaviour. The recession heralded a significant shift in the way consumers shopped especially as food price inflation hit 13% in August 2008 and put significant pressure on household budgets. Brand loyalty started to crumble and consumers moved from their traditional shop towards cheaper stores; Aldi and Lidl have seen significant sales growth in the last few years and discounters now hold 10% of the market share. It is not easy to arrest such shifts quickly.

The second issue relates to the number and size of stores. The large chains expanded the number of superstores not only to generate economies of scale and ease of access for shoppers but also to create space for sales of non-food items. Food retailers had begun to sell white goods, clothes and other items. However, keen online competition and increased willingness of consumers to buy online have seen these large stores become less profitable for the retail chains as footfall decreases.

As such the value they have in company balance sheets has declined meaning that this affects the profit and loss account as they are revalued. This is a major part of what has happened at Tesco and alongside the financial results came the announcement of store closures to reduce this drain on profits.

 

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