Bloomberg News

Tesco, Home Retail Lose Out as Competitor Cuts Hurt Sales

January 12, 2012

(Updates with closing share prices starting in fifth paragraph.)

Jan. 12 (Bloomberg) -- Tesco Plc and Home Retail Group Plc emerged as two of the main casualties among U.K. retailers over the holiday season after being outmaneuvered by competitors that offered discounts to cash-strapped Britons.

Tesco, the U.K.’s largest food retailer, reined back profit expectations today after promotions at rivals such as J Sainsbury Plc overshadowed its Big Price Drop campaign. Home Retail forecast lower earnings and said it will cut its dividend after a slump in sales at the Argos chain, which was targeted by Wal-Mart Stores Inc.’s Asda in a price campaign on toys.

“Tesco’s major problem is that the competition has been a little smarter and a little more proactive when it comes to promotions,” said Nick Bubb, an independent retail analyst with 35 years’ experience. “Argos is competing with supermarkets, Dixons and John Lewis. Everyone is out to get them.”

U.K. retailers discounted more deeply and earlier than in previous years as they fought harder for shoppers who had less to spend on gifts and festivities. Tesco chose not to follow a “blizzard of coupons” by competitors, Chief Executive Officer Philip Clarke said today, while Argos responded to Asda by offering 50 percent discounts on toys, reducing profitability.

Tesco fell 16 percent in London trading, the steepest decline since at least 1988, wiping 4.94 billion pounds ($7.6 billion) off the company’s market value. Home Retail declined 4.9 percent.

Profit Estimates

Profit at Cheshunt, England-based Tesco will be at the “low end of the current consensus range” in the financial year ending next month, the company said today. There will be “minimal” growth in so-called group trading profit next year as the retailer invests “hundreds of millions” of pounds in better quality, service and prices, and a greater range of products, Finance Director Laurie McIlwee said on a conference call. Before today, analysts had been estimating growth of about 10 percent, he said.

U.K. sales at stores open at least a year fell 2.3 percent, excluding fuel and value-added tax, in the six weeks ended Jan. 7, Tesco said, worse than the median estimate of 10 analysts compiled by Bloomberg for a 1 percent decline.

The retailer offered fewer coupons than competitors over the holiday as it focused on a campaign to cut the cost of 3,000 everyday items. Big Price Drop didn’t drive the improvement in volume needed to offset reduced prices, Tesco said.

Promotion Failure

“The lowering of prices did drive higher sales, but the pressure on margins rendered the promotion unsuccessful,” said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers in London. “Meanwhile, Tesco’s competitors had rather more success over the period.”

Sainsbury said yesterday that same-store sales rose 1.2 percent, excluding fuel and value-added tax. Sainsbury began its Brand Match price-comparison program in October and held promotions on fuel and toys as it fought for shoppers. The grocer offers to match the prices of Tesco and Asda on 12,000 branded products or to issue customers with a coupon for the difference at the checkout.

Home Retail, the owner of the Argos and Homebase chains, said today that full-year pretax profit will “be around the midpoint of the current analyst range” of 78 million pounds to 125 million pounds. The Milton Keynes, England-based retailer earned 254 million pounds on the same basis a year earlier.

Argos Decline

Argos same-store sales fell 8.8 percent in the 18 weeks ended Dec. 31, hurt by competition from supermarkets including Asda and Web retailers such as Inc.

“Argos sales continue to be impacted by the market decline in consumer electronics categories,” Chief Executive Officer Terry Duddy said in a statement, describing the trading environment as “both volatile and demanding.”

U.K. consumer confidence slid in December to the lowest level in almost three years, GfK NOP Ltd. said Dec. 21.

Halfords Group Plc, a U.K. seller of car parts and bicycles, and Mothercare Plc, a retailer of children’s clothing, also reported weaker sales today. At Halfords, revenue in the U.K. and Ireland declined 4.4 percent in the 13 weeks ended Dec. 30 as mild winter weather affected sales of car maintenance products. Mothercare said U.K. same-store sales fell 3 percent in the 13 weeks ended Jan. 7, although an increase in promotions fueled a 5 percent increase during the month of December.

JD Sports

Among a clutch of other retailers reporting holiday sales, JD Sports Fashion Plc said same-store sales rose 1.6 percent in the five weeks ended Jan. 7. House of Fraser Ltd., a closely held department-store chain, reported 3.6 percent growth in same-store revenue for the last nine weeks of 2011, while fashion retailer New Look said five-week like-for-like sales rose 3.6 percent. The three companies include revenue from an increase in value-added tax in their calculations.

Outside the U.K., Delhaize Group SA, the Belgian owner of the U.S. Food Lion supermarkets, reported sales that missed analysts’ estimates and said it will close 146 unprofitable stores. The stock dropped as much as 11 percent in Brussels.

Fast Retailing Co., Asia’s biggest clothing retailer, lowered forecasts for annual sales and profit after longer-than- expected summer weather damped demand for winter clothing.

--With assistance from Sarah Shannon and Clementine Fletcher in London, Vinicy Chan in Hong Kong and Cheng Herng Shinn in Tokyo. Editors: David Risser, Robert Valpuesta.

To contact the reporter on this story: Paul Jarvis in London at

To contact the editor responsible for this story: Sara Marley at

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