Baron Heseltine hails the supermarket.
I bumped into Baron Heseltine at the studios of British Sky Broadcasting (LSE: BSY) the other day. I hope you will excuse the gratuitous name-dropping. I say 'bumped into' but if truth be known, it was the first time I had ever met the legendary politician in person.
The reason why we met was because he was there to talk about elected Mayors. I, on the other hand, was invited to discuss the full-year results of Tesco (LSE: TSCO) with Anna Jones (there's another name drop).
Interestingly, though not surprisingly, Baron Heseltine had a view about Tesco when we chin-wagged in the green room. He hailed the company as one of the UK's remarkable success stories.
Every little helps
Tesco has undoubtedly helped transform the way we do our shopping. Some of us, of a certain vintage, can still remember the days when we had to traipse up and down the high street queuing up at the butchers, greengrocers, fishmongers and chemists just to get our weekly shop done. Many of us popped into the local baker for a loaf of freshly-baked bread and even had milk delivered to our doorsteps in the morning. Remember Humphrey?
Supermarkets, in particular those hyper-stores, changed all that with their one-stop, out-of-town shopping concept. The changes over the last decade or two have been nothing short of seismic, though some may describe it as bordering on catastrophic for our high streets.
Many local shops could just not compete with supermarkets that offered similar services for less. Pile 'em high and sell 'em cheap was the order of the day, with Bogof and Twofer offers drawing increasingly more shoppers into supermarkets.
Some of us now mourn the loss of our local shops. But how many of us would go back to queuing up on the high street and give up the convenience of one-stop shopping? It seems the die has been cast and supermarkets are set to wheel their trollies of growth down the aisles of opportunities... because they can.
Each vying for a stake of £160 billion
Currently, the Big Four supermarkets, namely Tesco, ASDA, Wm Morrison (LSE: MRW) and J Sainsbury (LSE: SBRY) wield tremendous power. They control about three-quarters of the entire UK grocery market, which is worth around £160 billion a year. Historically, food retailing has been growing at around 4% annually. There is no reason to suppose that it won't continue to grow at this rate.
Tesco controls around a third of the market, but it wasn't always that way. At the turn of the millennium, Tesco and Sainsbury's were almost neck-and-neck in terms of market share. They both had around 10% of the sector each. However, Tesco's aggressive domestic growth strategy allowed it to pull ahead rapidly.
That said, Tesco appears to have hit a ceiling in the UK. Some are even predicting the group's days of growth may be over.
Admittedly, Tesco is unlikely to grow its market share any further in the UK without incurring the wrath of regulators. This may explain its plans to grow internationally. Tesco now has operations in Asia, Europe and the US that collectively account for a third of annual sales. By way of comparison, Tesco's overseas sales are equivalent to the revenues that Sainsbury's and Morrisons generate in the UK.
In the UK, Tesco doesn't really need to do much more than stir the pot occasionally to ensure that it can at grow in line with the wider sector. All it has to do is correctly predict our shopping habits, which I suspect it can. I once met someone who worked at Tesco's Clubcard operation, who told me the supermarket probably knew more about me and my lifestyle than my closest friends could ever know.
Will Tesco (Click &) Collect?
In fact, could Tesco be one step ahead of its competitors by deliberately scaling back on its out-of-town store opening, because it knows that our shopping habits are changing? Can Tesco really predict that Click & Collect will be the next growth area, just as it correctly predicted that out-of-town shopping was a huge opportunity?
Perhaps Barron Heseltine is right. Perhaps Tesco is not only one of the UK's most remarkable success stories, but a success story that can continue. But then again, that profit warning in January has created some doubt...
... leaving the share a hot topic of discussion -- and debate -- for Baron Heseltine and myself, The Motley Fool and investors everywhere. Indeed, even gurus such as Warren Buffett and Neil Woodford can't agree on the prospects for the business.
Anyway, in my excitement at meeting Baron Heseltine, I made the cardinal mistake of calling him Michael -- but I am sure he didn't mind too much. I am just glad I didn't call him Tarzan, which really would have been a step too far.
Looking for the next great stock? Try our Motley Fool Share Advisor newsletter free for 30 days. Senior Market Analyst David Kuo and team will give you their two top share ideas on the fourth Monday of each month.
Further investment opportunities:
David does not own any share mentioned in this article. The Motley Fool owns Tesco.