Over the Christmas period Tesco pursued its corporate objective of market dominance in order to increase shareholder wealth. The ‘big price drop’ aimed to outperform rivals by achieving higher sales through slashing prices across a selection of 3000 everyday products. The initiative back fired when Quarter 4 results confirmed that the number of customers drawn in by its latest offer had not been enough to offset its lower prices.
On the 12th January 2012 the Tesco share price fell 16% after an announcement that profits would remain flat for the year as opposed to the 10% increase predicted by analysts. (FT.com, 2012) The announcement appeared to test the patience of many shareholders who opted to sell shares and invest their money elsewhere to improve short term gain.
This shows that market dominance does not necessarily contribute to shareholder wealth maximisation as lower profit margins adversely affected profitability.
Many investors see the drop in share price as a good entry point for new buyers as the blue chip continues to expand its vast customer base internationally whilst the share price is trading cheaply and the dividend of 4% remains attractive (Hargreaves Lansdown).
Achieving a high market share is often a key objective set by management as it acts as a catalyst for other key measures such as turnover which should in theory maximise returns for shareholders. However an obsessive sole focus on gaining market share can come as a detriment to other indicators such as profit. This may hinder the maximisation of shareholder wealth. A further example of this was in 2000 when International airlines suffered a 39% fall in profits of scheduled services as a result of chasing growth in market share at any price. Analysts warned that most airline strategies continued to be based on market growth and on increasing market share instead of being driven by profits (Arnold, 2006). ‘Airline shareholders should be moved to the top of the priority list for rewards’ (FT, 2000).
Although increasing market share can be seen as advantageous to shareholders, an overemphasis on the objective can bring dysfunctional behaviour. Over trading can bring with it dis-economies of scale as a business stretches its resources too far.
In Tesco’s case I believe that the company’s growth strategy is out-dated and should be revised as it has remained the same for many years. I believe that instead of organic growth in its home market the company should look for growth in new markets which are less saturated.
At the end of 2008 Vodafone went in the opposite direction of Tesco. In response to the changing economic and market conditions the company focussed on becoming leaner through cutting £1bn in costs and concentrated on providing more services to existing customers rather than pursuing new ones in such a tough market. This clearly went down well with the market, judging by the 10% share price increase on the day of the announcement and results. “Welcome to Recession Britain, where not-as-bad-as-feared is the new good…” (Management Today, 2008).
This blog concludes there is truth in the saying, ‘turnover = vanity, profit = sanity.’
