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It is not surprising then that Buffett expressed his concern when Tesco decided to enter the competitive US market with the Fresh and Easy brand stores. Though these are a much more organic-themed grocer, the chain would still be competing with giants such as Costco (COST) and Walmart. The Fresh and Easy store is a unique concept in that it is exclusively self-checkout, but the chain has yet to see the kind of turnover it needs to become a profitable entity for Tesco.
But beyond its small foray into the US Tesco sits in an enviable position on top of the British grocery market. Tesco holds the greatest market share at 30% followed by Wal-Mart-owned Asda with 16.9% and then Sainsbury’s (16.3%) and Morrisons (12.3%). Collectively these grocers account for 76% of the Tesco grocery market. This kind of market power lends itself to excellent economics (for shareholders) and sometimes as was the case recently, incidents of impropriety.
In 2007 the leading British grocers were accused by the Office of Fair Trading of conspiring to control dairy prices. Asda, Sainsbury and Safeway all confessed to the crimes, but Tesco (the largest) denies any agreement to fix prices. Whether or not the allegations ring true the company certainly would’ve been a beneficiary one way or another to the other grocers’ actions. If the grocers raised prices Tesco would’ve captured a higher asset turnover with its lower prices. If Tesco followed suit they too will have yielded higher profit margins.
In either case the British grocery oligopoly remains and Tesco’s healthy profit margins will likely continue into the future. With food prices being elevated as they are now and farming such a profitable trade we could even expect higher profit margins in the future if farmers start churning out bumper crops and consequently driving food prices down for the grocers. These favorable long-term economics are probably just some of the reasons why Buffett counts Tesco as one of his few international stocks.
About the author:
I studied at San Jose State University and got my BS in Business with a concentration in Finance. I was introduced to Warren Buffett through professor David Mendel and am indebted to him for his elucidating class.
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