The British grocer Tesco (TESO, Financial) has gained a lot of press of late, but not enough for its attractive stock price. The company reported declining UK sales as like-for-like store growth (less petrol sales) dropped 1.3%. Analysts apparently saw Armageddon in this as the stock shed some 20%. Tesco had reduced prices over the Christmas holiday to stimulate sales, but this maneuver was to little avail. However, the big picture was much brighter as the company's global sales grew 4% for the six weeks to January 6.
These trends couldn’t be more similar to what Wal-Mart (WMT, Financial) experienced in the previous year or so. The American retailer was showing several quarterly sales declines in its US operations despite growing international (and total) sales and getting hammered in their stock price. Sure enough US sales would turn a corner as the company made adjustments and so did the share price.
Tesco now sells at a price to earnings of 9.8 with a dividend rate of 4.82% (when TSCDY stock was at $14.5). This is considerably less than what Buffett paid in 2011 as the stock sold no lower than $16.36 during the year. The company is the largest grocer in the UK, the second largest in South Korea and a leading retailer in many other Asian countries where it is seeing much of its growth. The company also has a blossoming operation in the US under the Fresh & Easy name. The Fresh & Easy business had seen a 19% like-for-like increase in growth, but some underperformating stores had recently been closed.
Tesco, unlike Wal-Mart, has had tremendous success in online retailing. The company has been selling online groceries in its UK market since 2000. Tesco and the other grocers have had the edge over Amazon which only recently entered the UK market. Tesco and fellow British grocers Sainsbury and Asda leverage their stores as the supplier to their online operation. Realizing the edge of the incumbent grocers Amazon is instead carving out its niche by selling bulk goods and hard to find products. Despite the crowded online grocery market, Tesco was still able to notch a gain of 15% in online grocery for the 6 weeks to January 6.
The book "The Grocers" by Andrew Seth and Geoffrey Randall offers some elucidating points on how the UK and US grocery markets have evolved. A revealing quote was how little the UK grocery market has changed over the last 60 years. The author writes, “In 1990 the market share of the top 20 firms [grocery in UK] was roughly the same as that of the top 20 in 1950” (it hasn’t changed much since 1990 either). Surely that could not be said of the US. A&P, for example, which once held some 13% of the national US market (entirely in the northeast) is recently bankrupt. The US, until recently, had been a highly fragmented market compared to the UK with many regional grocers and this was not just out of chance.
A law was passed in 1936 called the Robinson Patman Act and this law effectively prohibited price discrimination, in particular that of suppliers whom offered discounts to large customers who could purchase in bulk. This law effectively favored the “mom and pop” type shops as they were able to procure goods at similar prices to much larger competitors.
The UK was constrained by no such law. Grocers enjoyed the economies of scale by consolidating and having national chains. This type of market power necessarily lent itself to a very difficult market for smaller grocers hence the relatively unchanged market shares. Not surprisingly this is probably why Buffett was concerned about Tesco’s incursion into the US. Tesco’s small subsidiary would be going to war with the Wal-Mart’s and Costco’s which have the scale and turnover to price at low levels.
Tesco’s recent slide in UK sales may be a concern in the short-run. For long-term investors like Buffett, there is probably little concern. The UK economy will improve in time and Tesco will still be selling groceries many more decades into the future.
Disclosure: Long TSCDY
For the first article on Tesco
These trends couldn’t be more similar to what Wal-Mart (WMT, Financial) experienced in the previous year or so. The American retailer was showing several quarterly sales declines in its US operations despite growing international (and total) sales and getting hammered in their stock price. Sure enough US sales would turn a corner as the company made adjustments and so did the share price.
Tesco now sells at a price to earnings of 9.8 with a dividend rate of 4.82% (when TSCDY stock was at $14.5). This is considerably less than what Buffett paid in 2011 as the stock sold no lower than $16.36 during the year. The company is the largest grocer in the UK, the second largest in South Korea and a leading retailer in many other Asian countries where it is seeing much of its growth. The company also has a blossoming operation in the US under the Fresh & Easy name. The Fresh & Easy business had seen a 19% like-for-like increase in growth, but some underperformating stores had recently been closed.
Tesco, unlike Wal-Mart, has had tremendous success in online retailing. The company has been selling online groceries in its UK market since 2000. Tesco and the other grocers have had the edge over Amazon which only recently entered the UK market. Tesco and fellow British grocers Sainsbury and Asda leverage their stores as the supplier to their online operation. Realizing the edge of the incumbent grocers Amazon is instead carving out its niche by selling bulk goods and hard to find products. Despite the crowded online grocery market, Tesco was still able to notch a gain of 15% in online grocery for the 6 weeks to January 6.
The book "The Grocers" by Andrew Seth and Geoffrey Randall offers some elucidating points on how the UK and US grocery markets have evolved. A revealing quote was how little the UK grocery market has changed over the last 60 years. The author writes, “In 1990 the market share of the top 20 firms [grocery in UK] was roughly the same as that of the top 20 in 1950” (it hasn’t changed much since 1990 either). Surely that could not be said of the US. A&P, for example, which once held some 13% of the national US market (entirely in the northeast) is recently bankrupt. The US, until recently, had been a highly fragmented market compared to the UK with many regional grocers and this was not just out of chance.
A law was passed in 1936 called the Robinson Patman Act and this law effectively prohibited price discrimination, in particular that of suppliers whom offered discounts to large customers who could purchase in bulk. This law effectively favored the “mom and pop” type shops as they were able to procure goods at similar prices to much larger competitors.
The UK was constrained by no such law. Grocers enjoyed the economies of scale by consolidating and having national chains. This type of market power necessarily lent itself to a very difficult market for smaller grocers hence the relatively unchanged market shares. Not surprisingly this is probably why Buffett was concerned about Tesco’s incursion into the US. Tesco’s small subsidiary would be going to war with the Wal-Mart’s and Costco’s which have the scale and turnover to price at low levels.
Tesco’s recent slide in UK sales may be a concern in the short-run. For long-term investors like Buffett, there is probably little concern. The UK economy will improve in time and Tesco will still be selling groceries many more decades into the future.
Disclosure: Long TSCDY
For the first article on Tesco
