Comment: Tesco finds itself stuck in the middle as market share is eroded

On the face of it this is another set of torrid results from Tesco as it continues to lose the battle against a weak consumer climate and dual pressures from the discounters and Waitrose.

Though chief executive Philip Clarke’s plan to ‘Build a Better Tesco’ through investment in prices, stores and service is showing some signs of impact, the slow pace is sure to worry the City further, raising more questions over Clarke’s tenure and putting its industry-leading margin under pressure.

Outside its home market, Tesco’ sales were squeezed by currency changes. Its presence in Eastern Europe was generally positive, its Irish business is recovering and political unrest in Thailand damaged performance. However, the longer-term plan of consolidating its overseas interest continues to besensible.

Tesco’s story of declining UK sales is becoming an all too familiar event among the big four, who have found themselves somewhat stuck in the middle, as discounters Aldi and Lidl at one end, and Waitrose at the other, erode market share. But how is Tesco reacting, and is it working?

To be fair to Tesco, there are some points of progress. It has refocused price investments on lines that matter to its customers, rather than its previously more indiscriminate couponing.

It has also cut delivery charges, introduced free grocery click and collect and launched the Clubcard Fuel Save. These initiatives have brought some much-needed new relevance in the competitive grocery market, although holding down and cutting prices has undermined headline sales growth figures.

Meanwhile, Tesco’s store refresh programme is on track, bringing a ‘new Tesco’ to 650 neighbourhoods and including over 100 of its Extra hypermarket formats.

The £1 billion investment programme underpinning this, which was unveiled in 2012, is supposedly leading to uplifts of close to 7% at overhauled stores; and obviously such a level of capital investment will continue to impact short-term profits, as Clarke alludes to.

This first quarter performance was certainly on the cards for Tesco given its current predicament. There is some evidence that Tesco is steering towards recovery, but it is the biggest ship of all to manage, against the headwinds of fickle, price-savvy consumers and an onslaught of purist value-players whose appeal is only building, while players at the more forgiving premium end excel through focused brand strategies.

Even as economic growth picks up, it is uncertain as to what extent Tesco can re-emerge from the perils of the middle-market as the same force it has been for much of the last decade.

George Scott is the lead food and grocery analyst at Conlumino