Conlumino viewpoint on Tesco and Travis Perkins
Conlumino Consultant George Scott comments on Tesco: This is a gloomy headline from Tesco, with its bottom line profits at the pessimistic end of market expectations, underlining the scale of the task facing chief executive Dave Lewis.
Its drop in trading profits reflects it broad competitiveness, which has been consistently weak in recent years, while its pre-tax loss is indicative of deeper structural challenges. However, this level of pain is something the retailer needed to go through to clear the decks and behind the headlines Lewis should be commended for his bullish approach in seeking a turnaround. This has led to some improvements in performance over its second half and is putting the retailer on a more relevant footing for future competitiveness.
In the UK, the pressures discounters Aldi and Lidl have put on Tesco, as well as the wider Big Four, have squeezed footfall and led to an intense price war, which has eroded margins. UK full year LFLs reflect this, but there are more recent signs of success following some fundamental investments in positioning since Dave Lewis has taken over. In Q4, customer transactions increased 1.5%, and LFLs softened to -1.0%, helped by investments in instore staffing, a consolidation and improved availability of products and improved pricing on hundreds of branded products. These investments, and less focus on commercial income from suppliers, contributed to the vast fall in UK trading profit, but are a much-needed hit to improve Tesco's longer-term predicament and relationships with suppliers.
Overall these results do not make harsh reading for Tesco, starkly showing the extent of its demise in recent years, as it has over expanded its business without investing sufficiently in its core positioning, especially in its mainstay presence in UK groceries. But there are some more positive signs of a recovery, with its loss in UK LFLs softened over the second half, and we believe actually grew somewhat at the start of 2015, suggesting its more recent brand initiatives are beginning to pay off.
The key challenge for Tesco now is how it manages its cash to drive future investments in competitiveness. It is pursuing a tight schedule of streamlining, having achieved £250m of cost savings partly through the closure of its Cheshunt head office. But its pension deficit is still substantial, and having agreed to make contributions of £270m per annum, it needs to lighten up its asset base to create more cash. Indeed it was muted that Tesco was to announce plans to plans to sell off at least part of its Dunnhumby loyalty and analytics business, but this was not forthcoming.
Consultant Greg Bromley comments on Travis Perkins:
Although growth has slowed slightly on a year-on-year basis, Travis Perkins' consumer division continues to outperform the overall DIY market, with healthy rises in both total and LFL sales, with the latter up a sizeable 13.3% on a two-year basis.
In terms of category specific performance, Travis Perkins has seen a recovery in Kitchen & Bathroom sales, although it states this was offset to some degree by lower roofing and fencing sales. The group has also noted a healthy performance of its expanded outdoor product range. Outdoor products and outdoor furniture in particular, is likely to become an important growth spot in the wider DIY market going forward, as disposable incomes continue to recover, and consumers feel confident in buying these big ticket items that they may have previously deferred.
This period has also seen the retailer make further investment in price, with offers on product areas such as insulation, paint and power tools. While some criticism can still be levied at the heavy DIY feel of its stores versus softer rivals like Homebase, this investment into price should go some way to offset this, with cost of goods still a central driver of store choice in this sector.
The group continues to work on improving its multichannel offer, with online sales boosted from click & collect. Wickes shoppers are now able to collect items in one hour, which will likely prove popular with both tradesmen and the general public doing DIY jobs around the home. Wickes has opened two trial format stores in Chatham and Doncaster, which offer improved ranges and better use of space. Physical expansion is also still firmly on the agenda for the group, with a further nine Toolstation stores opened over the period.
Overall, this is a healthy set of results for Travis Perkins. What is most impressive is the way the retailer continues to recognise weaknesses in its business and proactively work to rectify these with the investment into price, refreshing existing stores and trialling new formats, and improving click & collect being a few examples.
Challenges do lie ahead, namely the waning interest in DIY among the British public, and the continued threat of new players. Here, Poundland has seen its recently launched budget DIY range prove popular, while the discount general merchandisers, like Wilko, and the grocers continue to compete, especially on price. However, Travis Perkins' DIY expertise, and indeed the heavy DIY nature of its stores, may prove an important differentiator, especially as the done-for-you (DFY) trend continues to flourish around the country. This, along with further investment into its proposition, should be enough to safeguard its market share, at least in the short-to-medium term.