Broker snap: JPMorgan says Tesco feeling pressure from Aldi, Lidl

25th Sep 2013 10:17

Supermarket group Tesco was hit by a downgrade on Wednesday by JPMorgan Cazenove from 'neutral' to 'underweight' after the bank said that the company will be the most affected by structural problems in the UK food retailing industry."The discounters (Aldi, Lidl) are disrupting the price/range architecture that the 'Big 4' used for two decades, the customer is demanding a simplified product range, and there is a need for reduced mid-tier pricing," said analysts Jaime Vazquez and Borja Olcese."With Tesco's initiatives having had limited success, weak like-for-likes, and margins persistently above peers', we think Tesco is more likely to go through a painful rebasing of pricing and the gross margin (synonymous to a profit warning)."JPMorgan's proposed solution to Tesco's problems is to simplify product ranges to offer the best possible price/quality combination, whilst avoiding range extensions aimed at maximising basket cost and gross margins."We believe that value ranges have become largely redundant as Aldi and Lidl have improved the quality of their offerings and should therefore be downsized or abandoned. Furthermore, we think the price of the mid-tier, own label should be reduced."The analysts said that this strategy has worked for Leclerc in France and Mercadona in Spain which stalled the growth of the discounters in their respective markets.Tesco's target price has been reduced from 390p to 350p.The stock was down 2.78% at 363.6p by 10:59 on Wednesday. The share prices of rivals Sainsbury and Morrisons were also lower after JPMorgan maintained its 'underweight' rating for both stocks.BC