The Case For Tesco

2012 has so far brought disappointment for Tesco shareholders. After lacklustre Christmas figures and a small drop in market share, Tesco shares plunged over 20%, and have stayed close to these levels despite a strong rally in the underlying market.



For a long time Tesco’s UK stores have had little to worry about from their native competition. Their superior supply chain management, clubcard scheme and the general quality of their stores and great service has kept them firmly at the forefront of the UK grocer business. The piles of cash derived from the UK stores have also helped fund massive expansion into overseas markets making them the worlds 2nd largest retailer (by profits) behind Wal-Mart.



It seems however, that the competition is catching up. Tesco are facing strong price competition from the likes of Asda (Wal-Mart), and smaller discount retailers such as Lidl and Aldi are also posing a threat. Additionally they are facing increasing product and service competition from Waitrose, Sainsbury’s and Morrison’s.



It hasn’t helped matters that Tesco have branched out much further than the other supermarkets into areas such as consumer electronics, clothing, banking and insurance. All these areas are have been hard hit by the economic downturn, and as such have left Tesco more sensitive to adverse trading conditions than many of its rivals.
Some of these areas, especially ones that are exposed to cheap online competition, need to be looked at and evaluated accordingly, then when the economy finally improves, Tesco could perhaps be in a prime position to outperform once more.



At the current share price Tesco’s P/E ratio is 8.97 making it the cheapest UK listed grocer relative to earnings. Furthermore it offers a tasty 4.62% dividend yield, making it an attractive prospect for an investor seeking income, with also good potential for capital growth. A combination not to be sniffed at!