HSBC Securities Says Tesco Needs $4.9 Billion for Successful Turnaround
CHESHUNT, ENGLAND - A report by HSBC Securities suggests that it will cost over $4.9 billion in order for Tesco to turn around its recent economic slump, one aggravated by the £250 million ($403.25 million with today's exchange rate; at the time of the original story the value was listed north of $408 million) profit overstatement controversy which has led to the suspensions of 8 top executives.
“We think Tesco needs to do better in very many areas,” said HSBC analyst Dave McCarthy. “There are no short-term solutions, shortcuts or cheap solutions. Tesco has disappointed the U.K. consumer for too long and it must rebuild trust, which can only be done by giving the consumer a better deal.”
According to Bloomberg, McCarthy argues that a proper turnaround plan could require over 5 years and a 5-6% cut in prices. Despite costing between an estimated $2.58 billion to $3.06 billion, he says this price cut is necessary to fend off competition from the surging discount grocery sector in the UK.
The remaining costs of the turnaround plan proposed by HSBC Securities would involve a 20% increase in store staffing to increase service quality paired with new spending necessary to improve food quality. According to Bloomberg, the staffing increase is estimated to cost around $858.04 million, while food costs would increase by $1.61 billion.
According to McCarthy, taking these steps would “open up a meaningful gap” with Tesco main competitor, Sainsbury, putting it “within touching distance on price to Asda.”
In order to assuage some of the pain of the spending increases, McCarthy suggests Tesco could cut $1.61 billion out of its $19.36 billion cost base by reducing head office staff, scaling back its corporate jet program and eliminating non-key store roles.
Tesco's recent sales numbers may offer investors reason to hope for brighter times to come. While sales in the four weeks leading to October 12 have fallen 1.5%, this number is better than all of its competitors, save Asda.
CEO Dave Lewis told the Financial Times that Tesco's “recent performance in Food has been one of our strongest for a very long time. Whilst one swallow does not make a summer, we can take some small comfort that our efforts are having an impact.”
Hopefully this is just the first sign for a brighter future for Lewis and Tesco's many investors and partners in the produce industry.
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