Price war looming as Lidl effect slashes Tesco profits
TESCO has issued a second profit warning in as many months as Aldi and Lidl eat into its sales.
The chain slashed the dividend paid to shareholders by 75 per cent yesterday – prompting its shares to hit their lowest level in 11 years.
The move follows the ousting of chief executive Philip Clarke last month, with Britain’s biggest grocer haemorrhaging sales to cutprice rivals at one end of the market, and Waitrose at the other.
Now shoppers are set to profit from Tesco’s misery – with experts predicting the chain will use the money saved through lower dividends to fund steep price cuts in a bid to win back customers.
Yesterday Tesco said annual profits would be £2.4billion – some £400million lower than expected – after ‘challenging trading conditions’. The announcement, which helped to wipe more than £1billion from the value of Tesco’s shares, came just days after figures showed the chain is losing both sales and market share. Its new chief executive Dave Lewis will start on Monday, a month earlier than planned, in a sign of the scale of Tesco’s problems.
The firm’s shares on the London Stock Exchange fell 7 per cent to close 16.35p lower at 229.95p yesterday, after the firm said its halfyear dividend will be 1.16p a share – 75 per cent lower than last year. Around 10 per cent of its investors are small shareholders, while millions more hold Tesco shares in their pension funds.
The chain will raise £1.3billion by gutting its dividend and cutting back on makeovers for its shops. This will be used to reduce prices, analysts predicted.
Tesco launched its £1billion store refurbishment programme two years ago, but the initiative has failed to arrest a fall in sales amid the rise of discount chains.
Tight family budgets have driven shoppers to be more bargain-savvy and Aldi and Lidl have cashed in, more than doubling their sales in five years. This week Lidl said an influx of middle- class shoppers – dubbed ‘the Lidl-classes’ – would push sales up by a fifth this year to more than £4billion. Aldi is also expected to report a leap in trading in the coming weeks.
Asda, the only one of the ‘big four’ supermarkets not to lose market share over the last year, has fought back by offering a ‘price lock’ on
‘This once-great
company’
dozens of essential items. Morrisons, the first of the major chains to suffer due to its large number of stores in the North, has already set aside £1billion to cut prices.
Sainsbury’s has teamed up with Netto to open its own range of discount stores, but Tesco has yet to take major action. ‘The company has had its head in the sand,’ said one senior City source. Analyst Clive Black at the bank Shore Capital added: ‘ Tesco is expected to cut prices amongst a package of initiatives to regain custom lost elsewhere.’
He said the latest stock market developments ‘raise questions in our minds about the capability of the management under Mr Clarke at this once great company’.
Since the departure of Tesco’s visionary boss Sir Terry Leahy, the firm has floundered. It has consistently lost customers over the past three years, and last year reported its first fall in profits in two decades. The chain has also been forced into embarrassing exits from some of its overseas operations; pulling out of the US cost the chain more than £1billion.
Chairman Sir Richard Broadbent said: ‘The actions announced today regarding capital expenditure and, in particular, dividends have not been taken lightly.’