So miracles can happen. Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) suffered an annus horribilis in 2014, but this year it’s a different matter, with the share price up nearly 30% so far.
I can see several reasons for this mirabilis start to 2015 — my question is whether it is sustainable.
Tesco Turns
Markets had become so negative towards Tesco, still the UK’s biggest retailer, that an upswing in sentiment was almost inevitable.
All we needed was a bit of positive news, and the supermarket got that earlier this month, when Kantar WorldPanel reported Tesco’s first rise in sales in a year.
It was only a 0.3% pick-up in the 12 weeks to 1 February, but a rise nonetheless. It meant an additional 236,000 customers through the doors.
German Miracle Slows
I said last year that Aldi and Lidl couldn’t keep grabbing market share at a frenetic pace forever, and now we’re seeing signs of a slowdown.
Aldi’s sales still rose 21% during the 12 weeks, but that’s down from 36% last April. Lidl is following a similar pattern.
Shoppers don’t want to buy everything at the German discounters, and couldn’t anyway, given their relatively limited ranges.
This means Aldi and Lidl will either have to accept a limited role in the market, or upscale to Tesco-like levels of choice, which would mean a different (and more costly) model.
Dave Gets Drastic
Another major reason for the Tesco turnaround is that markets have been impressed by no-nonsense new boss Dave Lewis. Inheriting such a shambles has worked in his favour, by giving him the freedom to take drastic steps such as shutting stores, closing the Tesco HQ, junking its private jets, culling 10,000 jobs, and terminating the final salary pension scheme.
It’s brutal, but investors like that kind of stuff.
Thinking Outside BlinkBox
Lewis has also offloaded BlinkBox, predecessor Philip Clarke’s ill-fated attempt to widen the Tesco model by breaking into online streaming, where Tesco squandered £40 million. I prefer businesses to do what they’re good at, rather than dabble in markets they don’t get.
He is also partly reversing the dash for convenience stores, which have proved popular, but also cannibalised superstore sales.
Wages Of Thin
Tesco should get another boost as shoppers feel slightly richer, with the Ernst & Young ITEM Club forecasting the first real terms wage growth this year since 2007. It isn’t predicting a wages boom, so don’t get too excited.
Investors have good reasons to smile on Dave Lewis, but it could all fizzle out faster than you can say “dead cat bounce”. Dumping stuff that doesn’t work is the easy part. Sacking thousands always raises a cheer in the City. Lewis needs to show that he can also work his magic in a positive way, by adding some polish to the Tesco brand.
He has turned around the collapsing share price. Now he needs to turn around customer perceptions as well.
