About a decade ago, Unilever (LSE: ULVR) was in the throes of upheaval. This consumer goods giant had expanded steadily, decade after decade, since the early years of the twentieth century. Its growth had coincided with thebeginning of the consumer economy in the West, and its spread around the world. Companies like Unilever, Procter & Gamble and Coca-Cola were some of the strongest investments of the post-war period.
The supermarkets are under pressure
But as the century drew to a close, the growth of consumption in Western economies slowed, andthe supermarkets increasingly had the upper hand in their dealings with the consumer goods companies. With reduced pricing power, the margins, profits and share prices of firms like Unilever were falling.
The company responded by stopping its expansion, and by scaling back its business. It was a time of terrible pain, with thousands of jobs lost. But the manufacturing titan emerged the other side transformed.
Fast forward to today, and now it is the supermarkets thatare under pressure. After so many years of growth, too many market entrants with the rise of the discounters on the one side and premium retailers on the other mean that theUK is oversupplied with shops at a time whenshoppers are not spending any more money. It is now consumers who have the upper hand.
Ofcourse,you can takea comparison too far, and Im sure Tesco (LSE: TSCO)wont experience anything like the job losses that the consumer goods companies experienced. But chief executive Dave Lewis, an alumnus of Unilever, can see clearly the difficulties Tesco has.
But Tesco is now facing reality
What has been impressive is that Tesco is now facing reality. It has stopped blindly expanding, oblivious to the state of the retail sector. There will be no more ridiculously expensive corporate jets. It is ensuring corporate and financial integrity, by dealing with the recent accounting scandal. And it is focusing on improving retail, instead of being distracted by businesses like blinkbox.
These are very positive steps, and the gradual recovery in the share price shows that the market approves. But analyse the fundamentals of the company, and you will see how far Tesco has to go. At the current share price of 224.7p, consensus predicts a 2015 P/E ratio of 22.7, rising to 26.2, with a dividend yield of just 0.5%. Even with the share price having fallen so much, the company still looks expensive.
This gives you some idea of the challenge Tesco now faces. Profitability willgradually improve, but this will take several years. This firmwill eventually be a recovery play, but the shares currently lack appeal and I still think it is too early to invest.
However, Tescois now taking all the right steps to ensure that it will soon, like Unilever, be able tolook to the future not with fear, but with hope.
Foolish final thought
And manyinvestors reading this article hope tomake a million in the market. Some of you will succeed. If you really want to make money from investing, then I highly recommend youread our guide, which gives a series of easy-to-follow, practical steps to making your dreams reality.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.