SUPERMARKET GIANT Tesco's profit margins in the Republic are significantly higher than in the rest of the company, according to a confidential draft business plan seen by The Irish Times.
The document reveals that Tesco Ireland’s profit margin, which has long been a closely-guarded secret, was 9.3 per cent last year and is projected to rise to 9.5 per cent this year. This compares with a margin of under 6 per cent in its parent company.
Last year, the State’s biggest supermarket chain was on course to make profits of €248 million, the document states. This is equivalent to about €124 per customer a year. Profits are projected to rise to €255 million this year.
The figures are contained in a draft business plan drawn up in mid-February, which set out the company’s ambitious price-cutting plan eventually unveiled last week. Tesco’s financial year runs up to the end of February.
It details how Tesco aims to become significantly cheaper on brands for which people travel to Northern Ireland and to gain customers from competitors that cannot match its price investment. At the same time, the company aims to boost profits and market share in a declining market.
Tesco last week announced that it was cutting 12,500 prices in stores near the Border by an average of 22 per cent.
The plan shows that the across-the-board reduction in prices at its stores is 8.3 per cent. After the price cuts, goods in Tesco’s Irish stores will still be 13.2 per cent dearer than in the UK. The document warns that Tesco may have to raise prices again if sterling appreciates against the euro or inflation rises in the UK. This would mean that goods sourced in Britain would be dearer to purchase.
The company foresees a major supermarket price war arising from its strategy, with Dunnes following Tesco on price, but eating into its “war chest” for driving price cuts and promotions by doing so.
The plan forecasts Dunnes losing customers to Tesco, and says SuperValu will not be able match all price reductions and will lose customers to both Tesco and Dunnes. Superquinn, it is forecast, will lose customers to all its rivals.
According to the document, Tesco Ireland’s head office in Dún Laoghaire is being “transformed” into a country office by redeploying roles to the UK and outsourcing work to India. This is expected to save €13 million.
Some suppliers have criticised the increased prominence given to UK brands in Tesco’s new store layout and have claimed traditional Irish brands will lose out.
The company has been seeking price cuts of over 20 per cent from Irish suppliers to match those achieved in the UK.
The document says a “large proportion” of commercial buying will be “aligned” with the UK business in order to reduce cost prices.
Tesco was 0.5 per cent dearer than Dunnes Stores before the latest round of price cuts, it says, but the target is to be 2 per cent cheaper than its rival.
It says that although the Irish market is very challenging, the current environment in which consumers are more price-conscious provides an opportunity for Tesco to use its global scale and skill to lead the market through a period of change.
“This will not only give us a strong competitive position versus Irish competitors but it will also close some of the price gap with Northern Ireland.”
The Irish Farmers’ Association yesterday called on the Government to introduce legislation to regulate the retail grocery sector.
IFA president Pádraig Walshe claimed powerful supermarket groups were “out of control”.
