ADVERTISEMENT

Tesco Suffers From Weak U.K. Market

Tesco Suffers From Weak U.K. Market

(Bloomberg) -- Amazon.com Inc. stepped up its push into the U.K., threatening Tesco Plc with tougher competition as Britain’s largest retailer said it’s feeling the squeeze from Brexit-related political turmoil.

The U.S. online giant is expanding its alliance with Wm Morrison Supermarkets Plc to offer groceries in more cities across the U.K. The move puts more pressure on rival grocers, including market leader Tesco, to ramp up their own online operations in one of the world’s foremost e-commerce battlegrounds.

Amazon and Morrison plan to introduce Prime Now same-day delivery service to cities including Glasgow and Liverpool this year, Morrison said. The grocer’s shares rose as much as 2.9% in London, the most since January.

Tesco fell as much as 3.3% after the company said domestic comparable sales rose at only half the rate analysts expected in the first quarter. The results show the supermarket operator is not immune to the challenges facing other British retailers, which are reeling amid competition from discounters, the rise of online shopping and side effects of Brexit.

“The subdued nature we talk about is the consumer sentiment, which is weakening in the U.K.,” Tesco Chief Executive Officer Dave Lewis said on a call with reporters. “Some of that is clearly driven by the political situation.’’

New Leader

The governing Conservative Party is seeking a new leader after the resignation of Prime Minister Theresa May, which followed her inability to secure Parliamentary approval for her Brexit deal. The country’s planned EU exit has been delayed until Oct. 31, leaving shoppers in limbo over what comes next.

U.K. retail sales plunged 2.7% from a year earlier in May, the biggest drop since at least 1995 when excluding Easter distortions, industry figures showed. Empty storefronts are multiplying on the country’s shopping streets as billionaire Philip Green’s Arcadia Group Ltd. becomes the latest of a series of retailers to shut dozens of shops.

As consumers desert the country’s malls and downtown shopping districts, they’re buying more online, and about one-fifth of the U.K.’s retail spending occurs via e-commerce -- one of the highest proportions in the world.

Tesco said online sales rose 7% from a year earlier in the first quarter. Yet the company faces growing digital competition -- not just from Amazon and Morrison but also from home-delivery operator Ocado Group Plc, which formed a partnership with Marks & Spencer Group Plc in February.

“Morrisons at Amazon” is currently available in four cities, where many customers can receive groceries within one hour of ordering. The service will also enter the English cities of Newcastle, Sheffield and Portsmouth this year, and further locations in coming years. Amazon has also led a $575 million funding round at London-based food delivery service Deliveroo, which is preparing to spread across the U.K.

Sainsbury, Asda

Until now, Tesco has used its scale to hold down prices, insulating it from the troubles faced by rivals like J Sainsbury Plc, whose bid to combine with Walmart Inc.’s Asda was blocked by regulators. The deal would have given them the purchasing heft to rival the market leader.

Tesco said it was still growing more rapidly than the overall U.K. market as it expands its range of private-label items. But the 0.4% rate in the first quarter was a sharp slowdown from the fourth quarter’s 1.7% gain.

The company suffered from comparisons against a particularly strong period last year, when it benefited from warm weather and a royal wedding. The Booker wholesale division, which has been driving growth, continues to expand but was also held back by a similar effect after securing contract wins last year.

To contact the reporters on this story: Thomas Buckley in London at tbuckley25@bloomberg.net;Thomas Mulier in Geneva at tmulier@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Marthe Fourcade

©2019 Bloomberg L.P.