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There may be more to worry about than the nagging problems in Europe, especially for investors in the UK’s biggest supermarket chain, Tesco (LSE: TSCO). Tesco recently recorded its fall drop in profits since 1994. The pre-tax profit of the supermarket chain came falling by a whopping 11.6% which stood at £1.7billion for the last six months to August 25, 2012.
A good look at the books will reveal that much of the loss was as a result of the £1billion investment program to improve its UK stores, which was earlier announced by the chief executive Philip Clarke in April.
What should be the first line of concern for most investors is the actual value that this investment will eventually add to the long term sales of the chain store. The bulk of the investment which has gone into the installation of red rack scans that allows buyers to scan as they shop which will let them register and pack all of their shopping as they go around to make payment.
What should be worrisome for investors is the fact that this innovations, if it actually is (Waitrose had the system first) may turn out to be a complete turn off for customers, as some have discovered with the self-checkout system. Apart from the fact that it will appeal to customers who are gadget freaks, much of the investment will do little in cutting cost in the future, especially in terms of personnel.
And what is more, Sainsbury (LSE:SBRY), the ardent competitor to Tesco has recently shown sales growth that outpaces that of Tesco.
Outside of Europe, Tesco also have problems International profits that have gone down 17.1% to £378m in the six-month period. Much of these International problems seem to have grown out of the South Korea market, which is the largest market in Asia, where newly established regulations has restricted opening hours for big retail shops like Tesco.
With Tesco now having to close stores for two Sundays in a month and only allowed to stay open from 0800 until midnight, the store itself has confessed that it is likely to lose about £100million in profits in the full year, as Sunday is considered a big trading day in the Asian country.
Not limited to the woes in South Korea, the company also faces challenges in China, a country that is increasingly seeing a drop in consumer demands and spending.
While many shareholders may still effortlessly wave away these strings of International market woes, not many will be able to ignore the recent successful showing of the much re-invigorated competitor – Sainsbury which has become more visible with its Brand Match Campaign and also succeeded in taking chunks of the market share from Tesco.
But for how long?
