UK retailer Tesco turnaround offers lessons for troubled Woolworths Limited

Credit: James Arboghast

UK supermarket retailer Tesco has reported its first increase in same-store sales in more than 4 years, signalling that discounters Aldi and Lidl face a fight from Britain’s largest grocer.

UK same-store sales rose 1.3% for the six weeks to end of January, although they were still down for the quarter by 1.5%. Year to date, Tesco’s share price is up more than 27%.

It’s clear that Tesco is making progress, in fact, it’s not the only one, with WM Morrison and Sainsbury also posting positive same-store sales. Walmart’s discount supermarket retailer Asda is struggling to compete against Aldi and Lidl, with same-store sales crashing 5.8%, and each quarter increasingly worse.

Clearly Tesco’s strategy is working and offers lessons for Woolworths as it attempts to stem the flow of customers away to rival Coles – owned by Wesfarmers Ltd (ASX: WES). And that;s not to forget about Metcash Limited (ASX: MTS) supplied IGA independent stores, Aldi and even Costco.

Tesco has cut its prices, closed unprofitable stores, aimed to simplify supplier relationships, put more staff on the shop floor, and sold off part of its international operations to focus on its core market.

Woolworths is already doing some of that, finally making a decision to jettison its unprofitable Masters home hardware operations, and slashing prices drastically. Woolworths’ earnings margins for its food, liquor and petrol business had been gradually creeping up and were above 7% last year. In the latest half, earnings margins fell to 5.2% – more in line with rival Coles.

Much of that has come from Woolworths investing in lower prices, improving the customer experience, whether that’s through additional staffing hours, improving its fruit and vegetable offering, product redesign, brand refreshes or even upgrading trolleys, store signage and ease of access.

Foolish takeaway

It’s taken Tesco 4 years to turn around its business, but Woolworths shareholders will be hoping it doesn’t take as long for the supermarket retailer to acknowledge the issues, learn from the likes of Tesco and start generating positive same-store sales again.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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