LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about Britain's biggest supermarket, Tesco (LSE: TSCO) (NASDAQOTH:TSCDY).
I'll also be asking whether these negative factors make this FTSE 100 retail giant a poor investment today.
Tesco is often referred to as a "global retail giant." It's not. Its international reach amounts to a little cluster of countries in Eastern Europe and another small cluster in Asia. In all, Tesco operates in just 12 territories.
The company has tried and failed to establish itself in three of the world's five richest countries -- The U.S., Japan, and France -- and has been scaling back growth and rethinking its strategy in China.
If you want global, you need to look at some other iconic British retailers: Marks & Spencer operates in more than 40 territories, Burberry in more than 50, and Mothercare in more than 60.
Poor capital allocation
Shareholders have watched Tesco burn a sizable bonfire of cash over the past few years.
The U.S. misadventure, the expansion into general merchandise, a land bank that has become more of a liability than an asset, and forays into the second-hand car market and gold dealing can be seen not only as symptomatic of ill-disciplined and wasteful capital allocation but also as distractions that led management to take its eye off the core U.K. grocery business.
Tougher for Tesco in the U.K.
Arguably, Tesco's had it easy in the U.K. for the past decade or two. The group's rivals provided pretty poor competition, for one reason or another, enabling Tesco to successfully pursue a strategy of being all things to all people.
The landscape's certainly changed in recent years. Asda, Sainsburys, and Morrisons have become tougher cookies, while Waitrose and Marks & Spencer have been eating down from the top of the market and discount chains Aldi and Lidl have been taking market share hand over fist from the bottom.
Tesco's years of casual domination and easy property profits are over. The company's going to have to work a lot harder and accept significantly lower margins if its grocery market share isn't to be gradually eroded.
A poor investment?
I've been bearish on Tesco for quite some time now, mainly on the grounds that history suggests it can take many years for a supertanker supermarket to get back on course once it's drifted off.
However, a number of notable investors have given the thumbs-up to Britain's biggest retailer. In particular, legendary U.S. investor Warren Buffett has backed Tesco big-time. The multibillionaire owns 5% of the company's shares.