Henderson's Griffiths: Tesco battlefield moves to unnatural ground

Tesco has lost its stock darling status after issuing a profits alert and the retail giant needs to get accustomed to fighting a battle beyond its traditional front if it wants to maintain its superiority, according to Henderson's John Griffiths.  

The reaction to its profit warning, described as 'disappointing' by chief executive Philp Clarke, saw investors dump shares in the group, which were down by as much as 14% at one point.

One firm watching events closely is the asset manager Henderson, which held around 15 million shares in the firm through its International Opportunities Fund as at 17 November 2011 according to documents seen by Wealth Manager.

John Griffiths, Henderson’s director of multi strategy equities, believes the goalposts have moved over the last few years for the firm and it now must take its battle into unchartered territory if it is to maintain its dominant position.  

Griffiths said despite its recent initiatives such as triple clubcard points and the 'Big Price Drop', the retail giant had failed to catch up with its peers in terms of like for like sales. 

He also pointed out that with maturing space and reasonable inflation, its underlying volume performance is lagging the likes of Morrison and Sainsbury, which have produced, in contrast, positive sales figures in the current results season.

Griffiths deduces from this that Tesco is forgoing a year's profit growth to try to address the loss of market share in a clear gamble.

'It initially looks somewhat unclear how this reinvestment will manifest itself and whether it will be successful. An all out price war is somewhat counterproductive as all the major players would likely follow and then everybody’s a loser, Griffiths explained. 

'So it seems the battlefield will be fought, not on Tesco’s natural ground, in more intangible investments such as making the shopping experience better with perhaps more people to help and serve behind counters and try to get customers to fall in love with Tesco again in this way. Now whether such brand investment will make shoppers drive past a Sainsbury to go to a Tesco store is a mute point given that, unlike in the past, now all of Tesco’s main competitors are providing a good service and offer.  

Griffiths warned this strategy is likely to be of detriment to profit in the near term, which is likely to leave its shares under pressure.