More bad news for our favourite internet grocer – that’s Webvan2.0 Ocado in case you hadn’t already guessed.
Tesco is about to start a price war.
From Retail Week:
Speculation is mounting that grocery and general merchandise giant Tesco is preparing to launch a price offensive next week, sparking concern of a new price war.
Tesco is understood to be planning to focus on permanently low prices and may even shift away from promotions.
A tie-up with its Christmas campaign and Clubcard are also thought likely. The retailer was said by industry sources to be particularly gunning for Asda, but the repercussions of the initiative are likely to be felt across the grocery sector.
Indeed it will, especially in Hatfield, Hertfordshire, the home of Ocado.
Panmure Gordon’s Philip Dorgan reckons any Tesco ‘price initiative’ will hurt Ocado disproportionately. That’s because Ocado matches prices on 7,400 Tesco products. It will also have implications for the Ocado Saving Pass which (for an annual fee) offers discounts of at least 10 per cent off a range of 500 leading consumer goods products, he says.
In Monday’s trading statement, Ocado said that Period 10 had seen sales rise in line with Q3 (i.e. below expectations), but it expected higher growth in the remaining weeks of the year, subject to the competitive environment. We think that this move by Tesco will hurt Ocado’s sales numbers for the rest of the year and in future years.
We are therefore downgrading our forecasts again. We now expect Ocado to lose money for at least the next two years. We are downgrading our pretax profit for FY2011 from £2.1m to -£1.9m and for next year from £2.9m to -£7.1m. We retain our 50p price target and Sell recommendation.
Another two years of losses – at least!
J Sainsbury could also be hit hard by any Tesco pricing move, given its relatively weak financial position.
Sainsbury has negative free cash flow and is paying dividends out of debt. As such, analysts have argued that it would not take a lot for Tesco to significantly dent Sainsbury’s cash flow and to take away its ability to open new stores.
However, JPMorgan’s Matthew Truman isn’t expecting Tesco to torch prices to wipe out competitors.
The company [Tesco] has consistently noted that doing it would yield no upside for them, economically, politically or strategically. (See France for resulting margin destruction example.)
That said, he is expecting a pricing initiative because shareholders want Tesco to get its mojo back in the UK, and what they are doing at the moment isn’t working – rivals are taking market share.
In totality, we expect a broad reaching plan with numerous drivers designed to recapture UK momentum, ONE of which is price that in all likelihood will be self funded. It will not in our opinion constitute “torching” the Industry’s pricing structure or amount to any sort of “price war”. Common sense would suggest early Industry weakness and we would advocate buying the stock on any such weakness as we believe whatever is changing strategically is likely to be balanced and well thought through.
And Dorgan expects Tesco to remain disciplined.
We believe that Tesco will be proportionate and it will retain its return on capital targets, which would be a significant signal that it expects to derive medium term benefits for shareholders and that the other levers for higher returns, such as the US, are moving in the right direction.
So Sainsbury and to a lesser extent Wm Morrison can probably rest easy. Can the same be said for Ocado?
Related link:
Wheel comes off Webvan 2.0 – FT Alphaville