Tesco, Tarzan And Me

Published in Investing on 2 May 2012

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.

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David does not own any share mentioned in this article. The Motley Fool owns Tesco.

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Comments

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richjfool 02 May 2012 , 10:11am

As Tesco was a Dividend Edge recommended buy last year before its falls, what is TMF's current view on the stock?

bexleydave54 02 May 2012 , 10:39am

Good question richjfool - I know that it's a LTBH for Buffet but Woodford, whom TMF seem to have a lot of time for, is out.

F958B 02 May 2012 , 11:05am

richjfool

Although I don't know what DE were recommending as I wasn't a susbcriber, I still believe that Tesco's selloff was very overdone and was largely due to investment fashion at the moment.

This was underscored yesterday by the market's euphoric reaction to Imperial Tobacco's medicore results, which, personally, I thought were rather disappointing; Imperial Tobacco continue to see sales declining (think of it as Tesco reporting "like-for-like -4.1%) and, for now, it is simply price rises which are offsetting what would otherwise be a sharp decline in profits.
But IMT, like ULVR, will find that they can only raise prices so much in a recessionary environment before people cut back or switch.

"Ah, but baccy's a legal, addictive drug with dependent customers" I hear people saying.
That may be true, but why, then, did the market offer IMT shares for £17 a year ago, compared to £25 today? It's certainly not due to a proportionate increase in profitability, nor the likelihood of such a large rise in profits in the years ahead.

Investors hate a share when it's out of fashion; finging any excuse not to buy the shares because the crowd is also avoiding the shares - and that's why they rarely "buy low" but they do tend to "sell low".
Similarly, investors fall in love with shares which are riding high on a wave of positive sentiment - frequently "buying high".
But it is easy to make positive or negative arguments for almost any company. The share price at any given time reflecting what investors want to hear, while they conveniently ignore what they don't want to hear.

In 1999-2000, the likes of AZN, GSK, TSCO and VOD were riding high, while the likes of BATS, SVT, UU etc were dogs of the market.
The former have gone from darlings to dogs, while the latter have gone from dogs to darlings.
My suspicion is that many investors will be wondering why their current market darlings followed the path of GSK, VOD and the like between now and the 2020's.
The answer: sentiment, valuations and mean reversion.

richjfool 02 May 2012 , 11:10am

It will be interesting to see what Neil Woodford does about AZN now, (another Dividend Edge pick), and whether Buffet will buy that from him!

F958B 02 May 2012 , 12:02pm

Out of AZN (the one Woody kept) or TSCO (the one Woody sold), I'd rather be holding TSCO.

In the case of TSCO, the company is far from the near-death situation that we're being hyped-up to believe, while AZN's drop in profits this year is not unexpected as we all knew they had a patent cliff.

I think that - as in early 2011 - the market has lost interest in defensives and is dumping them at any excuse in order to fund the buying of last- year's bombed-out cyclicals.

MrBearBull888 02 May 2012 , 12:27pm

Hi Richfool

Your helpful postings are missed greatly on Share Advisor the replacement to Dividend Edge.

That said F958B makes a great point with his last answer - Sentiment one of the main driving forces behind share movements.

I believe in "buy when you hear the cannons and can smell the fear sell when the trumpets play and dentists start to offer share tips.

TMFDragon 02 May 2012 , 12:30pm

Hi richjfool

As a dividend investor I am happy with Tesco's prospective 4.8% yield.

UK growth is likely to remain anaemic. But that is not unexpected given that Tesco already has a significant share of the grocery market.

The turnaround and resumption in overseas growth is unlikley to be quick. Consequently there could be hiccups along the way.

I am happy to review each hiccup as they come along and add to my existing holding if it's only a hiccup and not something more serious!

Best

David

leftandright 02 May 2012 , 12:50pm

The one thing you can say about Heseltine is that he is 100% consistent: he's always wrong about everything!

If you want to know what to do, ask H and then do the exact opposite.

BrnzDrgn 02 May 2012 , 1:11pm

Ah Value investing - so your keeping in line with inflation then!

I'll stick with trying to be a contrarian and see if it pays off in the next 10 years.

I do not invest at £5 a share and I don't tend to buy the really low end ones - pick the bargains at the sweet spots then hold hold hold. Thankfully this was not the case with my building society shares and I sold a year before they crashed, free shares to capital, win win.

I did sell ARM too early (grrr to Motley Fool), otherwise I would have increased my invetsment five fold.

snikmij 02 May 2012 , 1:15pm

So how much has Heseltine invested in Tesco?

Does he have any connections to Tesco?

And he wasn't hoping by talking to David Kuo that Tesco would get a good report?

geeWCee 02 May 2012 , 1:56pm

Agree with F958B (surprise!), I trimmed IMT back a while ago. Tesco I'm happy to hold, I even added more just after the market over-reaction, why not?
BrnzDrgn I also sold out of ARM far too early - a case of trusting the judgement of an investment board over my own. Never again!

richjfool 02 May 2012 , 2:16pm

The current yield may be 4.8%, but as I bought last year at just over 404p (and am down about 21%) my dividend yield is about 3.6%.

F958B 02 May 2012 , 2:18pm

geeWCee

In fairness, Arm has usually traded at a price which is difficult to justify. As we found with the former high-flying SuperGroup; a stumble in operating performance can result in a massacre of the shares.
I have never been a holder of ARM, although I came close after the 2000-2003 tech crash and again after the 2007-9 crash.

Knowing when an asset is overvalued is easy in hindsight, but difficult in the heat of the moment at the time it peaks. The popular sentiment at the time can have a tremendous influence on our thought processes.
I usually have to override my emotions to make buys and sells because I am often going against current trends. When I took profits on silver in April 2011 (and again in September, along with some gold) I felt physically sick at selling a winner which everyone said was going to rise even more; fearing that I'd miss out as it went ever-higher and regret it for a lifetime.
As it turned out, logic actually kicked-in and now my silver and gold sale timing last looks to have been immaculate. I still hold some and actually I think it is close to the bottom of ts correction, but that's going a bit too far off topic.

F958B 02 May 2012 , 2:32pm

richjfool

Don't allow yourself to be shaken out unless the company really is in truoble, rather than simply going through a slow patch and a period of negative sentiment. I've said before that GSK went through this worry and rotten sentiment a year ago (dredge up the hopelessness from the Fool boards), while VOD were the whipping boy in 2010.

If you sold Tesco, what would you do with the money?

If you think about it logically and ignore your anger/despair/frustration due to the hit to your current holding, is the share you're about to sell actually likely to be your best purchase at current prices?

Investors would be much less bothered if the shares had slipped by 15% over several months or a year, rather than all at once on one day.
In fact, that's how bear markets work; they grind away slowly but persistently, with a few nice rallies to keep the hopes alive, so as not to panic investors until it's too late.

F958B 02 May 2012 , 2:36pm

Incidentally, VOD was my biggest holding in early 2010, while GSK was my biggest holding a year ago, and TSCO today.

It'll interest you to know that at the time I made them my largest holdings (i.e. taking them from about 6% of portfolio to about 9%), both my VOD and my GSK holdings were showing "paper" losses of 15% on the shares which I'd bought up to that point.

So the moral of the story is: be right and sit tight.

richjfool 02 May 2012 , 3:35pm

I'm sitting tight on Tesco, (but it inevitably it irritates me if I sensed something coming, could have done something about it, but was influenced by others not to, as happened with Tesco.

I got it right I think, with Unilever, I ignored my Advisors, who were contradicting themselves, and topped up a month or two back.

Similarly I think I got it right with AZN, by selling in anticipation and without waiting for any advice that might have come days later.

I'm happy to hold VOD and GSK. GSK is the larger, though I haven't gone overboard on the size of those holdings.

MrBearBull888 02 May 2012 , 3:55pm

Hi Rich you did well to ignore the confused advice which was very contradictory on TMF UK Share Advisor.

I wish I had bought more ULVR when you did. I found the confusing opinions somewhat off putting.

The original subscribers to Dividend Edge have been left high and dry with no portfolio guidance. I stil hold AZN substantially down but happy to hold VOD and GSK.

But thats a great comment from F958B be right and sit tight!

guykguard 02 May 2012 , 4:29pm

@F95B
Being wrong is what happens to people who think the numbers make the business, when it's the other way round. Tesco is in BIG trouble: you only have to compare the shopping experience in its stores with that of its rivals. There's no comparison! Tesco stores are dreary, cheap, shabby, and uninviting. The product offer is nothing special. The staff are mostly low grade, and the customers on benefits. Tesco has lost the plot and, as you yourself say, when sentiment moves against a share (read brand), it's time to bale out. Sentiment is going against Tesco in favour of its several far superior rivals: it'll take a minor miracle for the present iffy management to save the brand and, if they do, it will be mainly because the firm preempted so many of the prime sites not because people particularly like shopping in the stores.
No amount of gazing at the numbers will change the shopping experience. Put the fancy spreadsheets in the trash and go out and smell the market. It ain't going Tesco's way and that's why the market trashed the stock. (Btw: I started in the grocery business in 1959 so I've seen a thing or two down the years, but I may not have learned a lot .)

snoekie 02 May 2012 , 4:53pm

For the moment it remains on my watch list. Still a bit high for all that they have to do and the weakness of the market (notwithstanding the present level).

richjfool 02 May 2012 , 4:59pm

I did hedge my bets, by splitting my holding equally between Tesco and Morrisons.

geeWCee 02 May 2012 , 5:03pm

guykguard, do you go food shopping for a 'family day out' or to get cheap produce?
Who cares if the places are drab, since when did store snobbery affect a companies valuation? The Tescos I see are always rammed full to the rafters with shoppers who dont seem to give a monkeys what the place looks like. I dont shop there myself btw.

Arborbridge 02 May 2012 , 5:45pm

Hang on..."Tesco stores are dreary, cheap, shabby, and uninviting. The product offer is nothing special. "

But that's always been true, and it's why I rarely shop in Tesco. However, go into and store and it is likely to be buzzing with people spending money. It's a big money-making machine. Whether it can maintain its growth or profitability, I am not competent to judge, but it is still trundling along like a juggernaut.

If you want dreary and uninviting, try Aldi:)

Arb.

Clitheroekid 02 May 2012 , 7:24pm

you only have to compare the shopping experience in its stores with that of its rivals. There's no comparison!

What? Are you saying that a trip to Asda is an uplifting experience?

Most of the branches of all the big supermarkets that I've visited are much the same, and whether the experience is pleasant or not is far more a product of the area where they are situated than the brand.

Tesco stores are dreary, cheap, shabby, and uninviting. The product offer is nothing special. The staff are mostly low grade, and the customers on benefits.

This is an absurd generalisation, and I think it says rather more about the area where you live / shop than Tesco generally.

If they are as bad as you say why do so many millions of people continue to shop there? And there are 15 million Clubcard holders - I hadn't realised that you received one as a reward for signing on.

As you started in retailing in 1959 were you by any chance driven out of business by Tesco? Your comments sound like those of a bitter person, driven by prejudice rather than a rational assessment.

dukindiva 02 May 2012 , 7:25pm

There are a lot of comments here about sentiment, UK market share & 'buying experience' etc, but if you are a buy and hold bunny, especially with so called defensive shares, I would suggest that you should check out how much a company is making overseas and if that part of the business is growing, before pressing the 'buy' or 'sell' button.
The UK is not a growth area, it's an old mature Western market, I think VOD, GSK, ULVR, TSCO et al all have growing global market share ... so if you believe they have competent managements... buy and hold.

jaizan 02 May 2012 , 8:15pm

Tesco frequently don't have the product I went to get on the shelves, just the same as Sainsbury were about 10 years ago when they were struggling.
The stores are miserable. The clothing range has slipped.
The staff are demotivated and seem to work as slowly as possible, leading to long queues.
I did see them rushing to open a till on my last visit, but that was just because one of their own employees was doing some shopping & they choreographed it so one of their own didn't have to queue.
The customers don't get that service, or at least not in the Milton Keynes store.

This stock has to get cheaper before I buy it.

jaizan 02 May 2012 , 8:16pm

I do agree with the contrarian strategies of F958B though, it's just Tesco hasn't fallen enough for me.

nmmerri1 02 May 2012 , 9:40pm

F958B, I often learn more from your comments than the article itself so thank you and please keep them coming! As for the comments in this thread, some of the posters have the opposite effect to that which they are trying to achieve but at the end of the day (or when we stop putting in and start taking out) we will all know exactly how well we did and will have to reap the results.

eccyman 02 May 2012 , 10:14pm

If you want dreary and uninviting, try Aldi:)

- But they do have the best looking checkout girls ;-)

Call it gut feeling, but I think Tesco has simply become unfashionable and that'll take an awful lot of changing.

As for Heseltine - best Prime Minister we never had..

RobinnBanks 02 May 2012 , 11:42pm

'And there are 15 million Clubcard holders - I hadn't realised that you received one as a reward for signing on.' Very little helps!
Love that remark, Jimmy!

RobinnBanks 02 May 2012 , 11:46pm

But they do have the best looking checkout girls ;-)
Should have gone to Specsavers!

trevw100 03 May 2012 , 8:20am

Some good informative stuff their,but the best is from robinnbanks by a mile and true for my local store

jackdaww 03 May 2012 , 9:07am

went to our tesco extra yesterday.

there has been a revamp.

my impression is that its a lot better.

new staff who actually engage.

tesco has all the infrastructure in place.

it cant be that hard to pick up on what the competeitors are doing well.

i am looking to add.

josworth 03 May 2012 , 3:02pm

I work at asda. but buying tsco. they are the same , when staff leave they will not replace them.

fedupwithbanks 03 May 2012 , 5:14pm

Leftandright said:

"The one thing you can say about Heseltine is that he is 100% consistent: he's always wrong about everything!

If you want to know what to do, ask H and then do the exact opposite."

You beat me to it mate!!! LOL.

4spiel 05 Jun 2012 , 12:38pm

The aspect I think not mentioned here is that shares are being bought and held in greater numbers because of the absence of yield on cash. Until 2008 5% net of tax was possible in building society cash accounts and this has fallen.Northern Rock paid very high rates and the last of these 5year accounts yielding up to 5.6% net will come to maturity meanwhile with HM Treasury guarantee between now and 2013. So there is still a lot of cash that needs new homes and much will go into equity with corporate bond yields often low now unless you can wait 20 years for your money back. So I am very wary indeed of following the herd into lower and lower yields in shares that are already high compared unless there are very strong reasons for them to be at the price on their own merits. Sometime things will get back to normal if not to the excessive rates paid on cash from building societies due to excess demand for house purchase mortgages.But it only needs the TREND to reverse to knock high SP's -how far it will go is never the matter when it happens. Still think it important to keep plenty of cash in current times and buy on weakness. Tesco well there are mixed opinions so there are mixed possibilities and that means never put too much in one basket-it has much competition now and shopping means shopping around -you can save a fortune by buying different things you always buy in different shops. As for shares GSK (at £10) ULVR(no more than£17) Bats and IMT (at £15) should all have been bought before now none of them are cheap really -future growth in some may come but when the yield is lower than where cash OUGHT be but for global monetary policy . So the risk is on future % rates and whether further growth will materialise into reality.

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