Tesco shoots the Christmas lights out

By Neil Collins, Reuters Breakingviews

Published: 9:18PM GMT 12 Jan 2010





Tesco

The world's fourth-largest retailer, which takes more than one pound in every
eight spent in UK shops, was expected to struggle against improving rivals,
but once again Tesco
has shown the rest how to do it , turning in the strongest Christmas
performance in three years.

The combination of low interest rates, the temporary cut in value added tax
and the last splurge of public spending created an extraordinarily
favourable few months for UK shopkeepers. In addition, the supermarkets have
been adding non-food space and have gained at the expense of the likes of
Marks & Spencer.

British retailers have frequently fallen over when they go overseas, but Tesco
seems to be the exception. Even its U.S. adventure, dubbed Fresh'n'Queasy by
the doubters at the start, reported "strongly positive"
like-for-like sales growth. Results from Metro, the German retailer which
overtook Tesco in global sales because of the weak pound, made the point:
its sales fell 3.4 per cent in the fourth quarter while Tesco's rose by 6.9
per cent.

Once Tesco has rewritten the way the British buy clothing and electronics, its
next clear opportunity is in retail banking. Banks have never been so
mistrusted by their customers, and the UK government is desperate to
encourage new entrants. The established UK banks are busy signalling that
banking is harder than it looks, but Tesco has the scale, reach and
opportunity to change this business. If bankers think the grocers will not
take advantage, they are not paying attention.

An analysis from Nomura in October concluded that shares of Tesco were a
bargain at 389 pence – the equivalent of four for the price of three, on the
basis that total sales would rise by almost half over the next five years.
At 421 pence on Tuesday morning, they are still a pound short of the
broker's target.

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