Saturday, March 31, 2012
Normally I scoff at people who say things like "I'm buying Thomas Cook - people will always go on holiday", completely ignoring the current share price and the company's competitive and financial position. In fact Thomas Cook is down 90% over the last 2 years; people may always go on holiday but they are also free to book with online competitors.
But a walk down the cereal aisle at Tescos this week did give me an investment insight.
I bought Tesco shares quite heavily in January after their first profit warning in 20 years had caused them to fall by 20% or so in a matter of hours. I thought the fall overdone and expected to be quickly up on my investment. It turns out I was wrong about that as the shares have hovered around the same level ever since and even gone lower on occasion.
It was a long term investment of course and I can wait. TSCO yields 4,5% and the significant business that it does outside the UK should ensure that group profits continue to grow and give me a healthy return.
Certainly beats any cash ISA investment I know of.
There is no denying though that Tesco's UK retail core is suffering and its not just the recession. Other supermarkets are doing well and stealing market share. There are problems with non-food and the bosses admit that they have let standards of service and store presentation slide.
But fundamentally it's a question of their prices. They have got used to growing by simply opening more stores and retaining customers with gimicky Clubcard offers.
It has been obvious for some time that Tescos has become an expensive place to shop particularly when compared to Asda. To be fair to the management they recognised this long before the profit warning and acted last year with the Big Price Drop promotion.
The City was lukewarm about the plan and it didn't help much at Christmas when other stores, particularly Sainsburys, won custom with special offers and one off bargains which made Tescos "5p off own-brand cheddar" look a bit weak.
That's where the Honey Monster comes in. I noticed his Sugar Puffs were an eye-catching £1 under the Big Price Drop sign. Looking around I saw a host of other meaningful price falls right through the aisles.
What does that say to you? Management is backing its own judgement and sticking with a strategy that is aimed squarely at the right target - Tesco needs to be genuinely cheaper. Also they have listened to criticism and made the campaign stand out more. Tell'em About the Money! (imagine monster voice)
The news for Tescos has actually been pretty bad this week with an embarassing mice infestation in a London store grabbing the headlines ("Mice refuse to leave sinking ship"). All the articles have trotted out the lines about how Big Price Drop has failed and the company is on the ropes.
But if you take a contrarian view now would be a good time to buy Tescos. All this bad news is in the price and if the company is still holding its market share (down a mere 0.1% this year) while its everyone's favorite whipping boy and when it is still struggling to get its pricing policy right, what will happen when it puts things right - as I think it is - and the press start to pick on someone else?
From our website: Massive tax rises for Spain in 2012