April 28 ,2015 | by Thiago Kiwi

Tesco's record loss: is it time for a fresh look at supermarkets?

In the wake of Tesco’s mega loss, we wonder if it’s time for the death of the big supermarket.

Tesco’s pre-tax annual loss of £6.4 billion last year came as a surprise: analysts had only been estimating a loss of around £4 billion. It was the biggest loss in Tesco’s 96-year history, the sixth biggest corporate loss in the UK, and the largest annual loss ever witnessed by a British retailer.

Tesco is continuing to struggle after reporting late last year that it had lost 50 per cent of its market value in just 12 months. Chief executive of Tesco, Dave Lewis, said that "a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years" were the reason for the poor results.

However, looking at the underlying factors, could this huge loss also be testament to an evolution in shopping habits among the UK’s public?

 

Potential factors behind the figures

Firstly, a significant proportion of Tesco’s losses are due to a decline in the property values of its stores. In fact, this accounted for over two-thirds of the figure, and was driven by reduced footfall in some of its biggest out-of-town branches. It’s likely that people are ordering online rather than making the effort to visit these stores.

Another reason is a shrinking profit margin, which is now down to a little more than one per cent. That’s 3.9 percentage points lower than previously reported.

There are other supermarkets cutting into Tesco’s market share. Aldi and Lidl have grown in popularity and won over Tesco’s value-conscious customers, while high-quality stores - such as Waitrose or Marks and Spencer - bite from above.

There are also several one-off charges included in the figures that suggest Mr Lewis is taking a “kitchen-sink” approach to this announcement. He could be delivering all the bad news at once, leaving a smoother path ahead.

Tesco’s core business is operating at profit of £1.4 billion and it turns out that volumes of sales are up. The real reasons behind the largest loss in British retailing history are: slimmer profit margins, decline in property value and other one-off costs.

 

Online grocery shopping takes hold

Over a quarter of people turned to online shopping for their groceries in January, according to the latest figures from IGD.

The report also noted that 11 per cent of shoppers claim to purchase almost all of their groceries online. IGD forecasts that online shopping will more than double in value by 2019 and will then be worth eight per cent of the market, boosted by a surge in home delivery and click and collect users.

Meanwhile, online grocery deliverer Ocado unveiled its first profit in 15 years of existence and is looking to expand internationally, showing that online supermarket shopping is taking hold.

 

Will hypermarkets rise once more?

It seems unlikely, considering the penetration of the internet into our daily lives. At the very least, supermarkets will have to implement changes to lure customers back in store.

Figures from IGD show that more than three quarters of shoppers still head to the physical store for their grocery shopping. The convenience of having everything in one place could be the reason; or perhaps the supermarket is along their route home.

But for those that have jumped on the home delivery bandwagon, supermarkets can come up with innovative methods to continue attracting shoppers to physical stores. One example is the recently announced app from Sainsbury’s. The new app will allow customers to create a shopping list at home, guide them to the product’s location in store, scan the items, and then pay without needing to visit a checkout.

Stores will also have to revamp their layouts, pricing methods, and offer schemes - things that have slowly turned their own customers away.

Supermarkets and hypermarkets will probably survive the online grocery shopping revolution. But they will have to come out the other side highly changed in order to win over their customers again.

Thiago Kiwi

Thiago is the LSBF Blog Editor who manages news and features content on the site, and writes about business, finance, technology, education and careers.

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