Tesco PLC TSCO

We believe Tesco's recently announced price investments will hurt margins, but more importantly, they will protect market share. We disagree with management and the consensus view that price investments will be margin-neutral. Together, large multinational retailers with multiple formats already dominate the market share in food and nonfood categories in most of Europe, the U.S., and even in a good portion of, though not all, the major emerging markets. In our view, the U.K., most of Europe, and the U.S. are already over-stored. We therefore believe sales growth for any large defensive retailer will move in line with, at best, the low-growth, macro GDP environment that we expect over the next few years because of the inevitable austerity measures for most economies. We believe sales growth above GDP will have come from other large players, but at the expense of margin. Still, we believe management is making the right strategic decision to defend hard-fought market share. Carrefour S.A. CRRFY made the mistake of not reacting quickly to market share erosion at home, which resulted in multiyear declines in operating margins and returns on capital. We expect Tesco margins to decline but remain at levels that keep returns above its cost of capital, supporting our narrow moat rating.