Tesco Discounts Its Shares


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What's going on?

On Wednesday, results from UK supermarket Tesco – Britain’s biggest retailer – left investors hangry. The stock crumbled 9%, the most in two years.

What does this mean?

Tesco’s UK business did well. Its first-half sales were up 4% and its profit margin was fatter, too – thanks to food wholesaler Booker, which Tesco acquired earlier this year. The marriage was good for both parties – Booker’s sales grew 15% – as Booker’s a supplier to Tesco (Booker can keep the prices down for Tesco and Tesco can keep the business rolling in for Booker).

The stale cookies for Tesco were in its Polish and Thai businesses. While UK profit was up nearly 50% on last year, the overall results were spoiled by falling profit in those countries (and troubles in Asia look likely to continue).

Why should I care?

For markets: If you can’t beat ‘em, join ‘em.

With German discounters Aldi and Lidl wreaking havoc on the UK’s grocery market (Aldi has 8% of the market and growing, Tesco has 27%), Tesco’s coming to the table with its own discount store, Jack’s. Like the German insurgents, it’ll carry a far simpler, smaller range of products (2,600 compared to a Tesco supermarket’s 35,000), a majority of which will be own-brand – i.e. Tesco cola rather than Coca-Cola. Keeping it in the family like that means not having to sacrifice profit to suppliers. Tesco’s taking a leaf out of French supermarkets’ books – they’ve successfully fended off discounters, beating them at their own game.

The bigger picture: German discounters have their eyes on the prize.

While the UK’s grocery market was worth $250 billion in 2017, the US’s was worth $641 billion. For Aldi, the UK was just an appetizer – now it’s eyeing up the US for its main course. But the American market can be chewy and tough – Lidl’s been having difficulties and Tesco outright failed.

Originally posted as part of the Finimize daily email.

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