Tesco is keeping discounters at bay, says UBS

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Tesco PLC (LON:TSCO) should release reassuring results next month after significant strengthening in the past six months, according to UBS.

The supermarket, alongside the other ‘Big 4’, is benefitting from the increase in online penetration in the UK market accelerated by the COVID-19 crisis, which is leaving discounters behind due to the operational challenges of establishing an e-commerce platform.

READ: Tesco adds 16,000 online jobs as orders soar

Tesco, which analysts say is delivering encouraging results from the ALDI price match initiative, is looking to move to an ‘everyday low prices’ (EDLP) pricing strategy with suppliers being asked for significant price cuts.

Retailers using the EDLP method keep prices low at all times, unlike the High-Low Pricing where ‘high’ is the everyday price and ‘low’ is the lowest possible discount applied.

“In some categories – usually impulse, such as soft drinks, snacks and confectionary – significant reductions in shelf price could be achieved through an EDLP offer vs. promotion,” UBS noted.

“However it is the promotions themselves that drive volumes here – if the product is not in the food cupboard it won’t get consumed – and so it is not necessarily beneficial or commercially sensible for a supplier to agree to an EDLP model, as volumes may well be lost.”

Moreover, industry experts believe that Tesco is tactically doing the right thing by targeting ALDI with the view that it has replaced ASDA as the price leader in the market.

Looking ahead, UBS noted the strong customer metrics, sustained sales growth and substantially lower COVID-19 costs point to upside risks to full-year estimates, while the approval of the Asian deal in October or November should return GBP5bn to investors in the second half.

The upcoming results should also reveal more on the strategic agenda of incumbent chief executive Ken Murphy, who is taking the helm on October 1.

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