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Analyst calls for Tesco to start price war

A leading City analyst has called for the incoming chief executive of Tesco to embark on a massive UK price war, to cripple the competition and stop Tesco’s rivals opening a swathe of new stores.

Dave McCarthy, analyst at Evolution Securities, said Tesco should “reposition on UK pricing” under Philip Clarke, who becomes group chief executive at the end of next month.

“With a new chief executive and a depressed consumer, we argue that the time is right for Tesco to launch a major price repositioning, as it did in both 1977 and 1994. Sooner or later, there will be a war for sales as the retailers try to justify the huge capital expenditure being spent on new stores and it makes strategic sense for Tesco to be the first mover,” said Mr McCarthy.

He estimates this would cost Tesco about 10 per cent of group profits, but this would be less damaging to Britain’s biggest supermarket by market share than to its competition. Mr McCarthy argues that the big four supermarkets are in a “space war” to open new stores, which is costing them more than £4bn a year, including £2bn for Tesco.

“By lowering industry profits and cash flow, Tesco can make new stores unviable for the competition, while protecting its own long-term returns. Tesco can then curtail its UK openings and harvest cash flow to invest overseas.”

Mr Clarke has been mobilising his UK troops with a series of senior appointments. The latest is Ken Towle, who has been brought back from running Tesco’s business in China to run Tesco.com. Tim Ashdown, chief operating officer of the South Korean business, will replace Mr Towle in China.

Source : Andrea Felsted - FT.com

20 January 2011
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