I hate shopping in my local Tesco (LSE: TSCO). Despite a major makeover, the aisles seem too close together, the staff are often surly and disinterested, and the items I want are regularly out of stock.
Just this weekend I attempted to buy a bag of veg, only to be told I couldn’t as it was “not registered on the system”. I waited for the cashier to manually input its code or add the cost some other way, but she simply put it to one side and sighed sadly. “Can’t you sell it to me then?” I asked in surprise and the cashier shook her head and repeated slowly: “It’s. not. registered. on. the. system.”
There was a whole shelf of veg bags, none of which could apparently be sold – what a crazy, crazy waste coupled with appalling customer service.
Dawn of the discounters
And I am not the only person to have noticed Tesco’s fall from grace; sales have plummeted as customers abandon it in favour of low-cost supermarkets such as Aldi and Lidl. Disastrous overseas investments lost the company money and also lead to accusations it has lost focus on its core business.
Just this week, speculation that the company might slash its very competitive dividend has seen Tesco PLC’s stock market value slip below £20 billion for the first time in a decade.
So why is this on my ‘buy’ list? Quite simply, I believe that when you’re riding a beast this big, it takes time to turn it around. Tesco is beyond vast; it’s a high street under one roof with groceries, financial products, beauticians and more. Transforming the fortunes of such a vast empire takes time, and I am prepared to give the newly appointed chief executive Dave Lewis a chance when he takes over in October.
After all, there’s a Tesco in pretty much every town and the supermarket is investing more in its Metro and Express brands. The discounters may be winning bargain hunters but Tesco is in a strong position to capture customers who value convenience over sprawl.
While the brand’s overseas misadventures have cost it money, Tesco is actually enjoying decent growth in South Korea, Thailand, Poland, Hungary and the Czech Republic. That’s a pretty good starting point for a recovery.
Finally, the source of the dividend-cut rumours was David Herro of Harris Associates, which owns 3% of Tesco. He told The Sunday Times: “In general, dividends should be covered by free cash. This is not the case with Tesco . . . Either [it needs to cut the dividend] or generate positive cashflow. It should be cut if it’s paid for by borrowing.”
Frankly, if a major investor can stomach a cut in the dividend in order to get the supermarket back on track, then I can too. If you’re investing for the long term rather than hoping to make a fast buck, then Tesco could yet pull the rabbit out of the hat. Just give it time.
