This morning saw further progress from Tesco. The company is steadily moving away from the various self-inflicted disasters and getting its house in order. At the heart of this is re-establishing credibility and trust across its various stakeholders from suppliers through to customers and investors. Stores look better, less cluttered in terms of signage and POS, and with a cleaner proposition. This morning’s share price hike reflects the City’s unfolding relief that Tesco is turning round, and the company’s announcement of a target UK operating margin of 3.5% – 4.00% by 2020.
This margin aspiration is by far the most interesting element of today’s numbers in my view. Will it be delivered? As mentioned above, the stores look far better and with a clearer message. However, this is from a very low, confused base. There is a blandness about the stores and the offer, and it’s hard to see exactly what the Tesco of today really stands for. The business is caught in the middle, pressured from better priced value players below and more aspirational higher quality players above. The recent Aldi results were accompanied by a clear and unequivocal message – it will not allow the majors to close the price gap to the point where its further market share growth is impacted.
Going forward, Tesco needs to go further in developing a clear personality. Range editing has much further to go – it remains heavily over optioned in the vast majority of product categories. It needs to invest further in product quality, service and the general shopping experience, to put distance between it and the discounters. It needs to regain control of its own competitive agenda. Achieving all of this requires investment and in that context, Tesco’s margin target announcement looks optimistic.