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Ecommerce holds up for Tesco as its sales fall and its profits crash

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Ecommerce today proved a bright spot for Tesco in an otherwise gloomy year. While online grocery orders grew by nearly 20% in the full year, UK like-for-like sales fell by 3.6%, and, at the bottom line, the supermarket reported its worst-ever result, with losses of £6.4bn.

The supermarket today unveiled group sales of £69bn in the 53 weeks to February 28. They were 1.7% lower than in the same period last year, and 3% lower over the full, 52 week, year.

Group trading profit of £1.4bn was 58.1% down on last year, while UK trading profit of £467m was 78.8% lower than last time. Profits also fell in Asia (-18.4%) and Europe (-31.9%).

But when one-off costs, including a net £4.7bn loss on the write-down of the value of its store network and a £0.6bn write-down on its China joint venture with China Resources Enterprise, £0.4bn on restructuring costs and £0.2bn adjustment on previous years’ commercial income figures, were taken into account the company lost £6.4bn at the bottom line.

The figures put a line below a traumatic year for the company, in which the arrival of new chief executive Dave Lewis was soon followed by the discovery of a hole in the supermarket’s accounts. That hole related to the overstating of commercial income, with a figure of £208m now put on that. Since then, the company has aimed to focus on the customer and reduce prices, while overhauling the board with the appointment of key figures including new UK chief executive Matt Davies.

The company’s move into digital entertainment has been shelved: it has closed or sold its Blinkbox businesses, which offered movies, music and books to download, as well as Tesco Broadband.

The supermarket today said that over the coming year it would focus on three priorities of building competitiveness, trust and its balance sheet. Cost savings will be reinvested in the customer offer. It pointed to early green shoots, with customer transactions 1.5% up in the fourth quarter, the first growth since Tesco’s sales started falling in early 2012.

Acknowledging that this had been “a very difficult year for Tesco”, Lewis said today’s results reflected both poor conditions for grocery retaiers and Tesco’s own reduced competitiveness in recent years.

“We have faced into this reality, sought to draw a line under the past and begun to rebuild, and already we are beginning to see early encouraging signs from what we’ve done so far,” he said.

“Over the last six months we have put customers back at the centre of everything we do. By focusing on the fundamentals of availability, service and targeted price reductions, we have seen a steady increase in footfall, transactions and, most significantly, volumes. More customers are buying more things at Tesco.”

Commenting on Tesco’s results, Professor Crawford Spence of Warwick Business School, said: “These figures are absolutely huge – nearly the biggest loss in UK corporate history. However, they need to be understood in context. They relate mostly to asset write-downs rather than poor trading performance. Underlying trading performance for Tesco has actually not been too bad in recent months. In many ways Tesco has decided to make these losses now rather than later. It all needs to be understood within CEO Dave Lewis’s strategy of ‘taking a bath’ in his first couple of years in the job – basically, if he gets all the skeletons out of the closet early on then Tesco will look bad initially, but he will give himself a set of benchmarks that are relatively easy to surpass in the coming years.”

Professor Heiner Evanschitzky, professor and chair of marketing at Aston Business School, added: “Too much floor space and a misplaced focus on price are huge factors behind Tesco’s losses. Our shopping behaviour has changed enormously in recent years; we get what we need, when we need it at convenience-style stores. The age of the big weekly shop at the out-of-town hypermarket is over. As a result, the value of Tesco’s property has plummeted.”

Irina Pafomova, managing director and co-founder of Shopitize, says the fall in value of Tesco’s stores reflects the change in shopping habits. “The supermarket giant has been on the front foot with regards to growing market share in convenience stores, however, they’ve failed to predict shopper movement away from bigger out-of-town centres.

“The supermarket land grab 10 years ago probably wasn’t too much of an issue for most, the stores were growing in value, but they’ve become more of a burden resulting in retailers trying to find new ways to use their massive retail space.

“An increasingly price-conscious and convenience-focused market, combined with more and more consumers using their mobiles when shopping, has resulted in more demand for convenience and mobility. Destination store real estate has therefore become much less valuable.

“Retailers have also been exposed for the many ways they have been charging brands and suppliers. The high prices brands are forced to pay by the supermarkets for prime positions and involvement in marketing has encouraged them to look elsewhere to engage with shoppers. The benefit of the direct relationships they are now building has meant promotions with retailers are seen as a less essential way for brands to spend their marketing budget.

“Direct relationships between brands and consumers however are just the beginning of the wave. No matter their size and market share, brands are now realising the merit of the new mobile and consumer led approach and are starting to act.

“Consumers want to shop fast, easily and digitally. With loyalty schemes among supermarket shoppers continuing to fall in their use, mobile is allowing consumers to engage with brands and receive offers regardless of where they choose to shop.”

Our view: Even as Tesco’s profits have crashed under the weight of a top-heavy store network, whose value is now effectively being written down in the light of changing consumer behaviour, ecommerce has still held up at the supermarket. That bodes well for the future, for as this supermarket, like others in the sector, looks to put the customer first, it will do so through digital channels. It’s important for Tesco that its shoppers still want to buy from it. Whether they do so online or through the stores is another challenge, and one that will, no doubt, govern how the chain looks in years to come.

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