Tesco's UK revival dealt blow by finding of horse DNA in some of company's beef products; analysts say discovery could undermine consumer trust as retailer struggles to regain footing in domestic market

LONDON , January 21, 2013 () – Tesco Plc’s efforts to win back U.K. shoppers were dealt a blow after the discovery of horse DNA in some beef products caused the U.K.’s largest grocer to remove them from stores and prompted a barrage of negative publicity.

The Daily Mail and Daily Mirror newspapers both ran front- page headlines on the story, contributing to a decline in Tesco’s share price less than a week after it reported its strongest sales growth in about three years. The affected meat was also sold elsewhere, including Iceland Foods Ltd. and Lidl.

“The news is likely to, at least temporarily, reduce consumers’ trust in the quality of Tesco’s products, which is unhelpful at a time when Tesco is trying to rebuild customers’ trust in the quality underpinning Tesco own-label and Everyday Value products,” Caroline Gulliver, an analyst at Espirito Santo, said in a note received by e-mail.

The burgers that were withdrawn from stores in the U.K. and Ireland were own-brand products, an area that Tesco has been focusing on as cash-strapped shoppers seek cheaper alternatives to big brands. Chief Executive Officer Philip Clarke last year rebooted the company’s cheapest own-label range, dubbing it Everyday Value, and promising a focus on quality. That’s part of his 1 billion-pound ($1.6 billion) investment program aimed at regaining customers as discounters such as Aldi and upscale chains like Waitrose erode its still-dominant market share.

Tesco dropped as much as 1.7 percent in London trading and was down 1.2 percent at 345.4 pence as of 1:04 p.m. That trimmed the stock’s gain this year to 2.8 percent.

’Trust Issue’

The negative publicity brought about by the discovery of horse DNA in some products “is damaging because people don’t want to think they’re eating horse and it brings into question the whole trust issue,” said Matt Piner, research director at Conlumino. “Retail trust is harder to build than throw away.”

Tesco withdrew two frozen beef burger products from stores following tests by the Food Safety Authority of Ireland. The Irish body said yesterday that about 37 percent of the beef burger products it examined tested positive for horse DNA, while 85 percent showed pig DNA. They listed Tesco as one of the retailers that sold the products, along with Aldi, Lidl, Iceland Foods and Dublin-based Dunnes Stores.

One Tesco product contained 29 percent horsemeat relative to the beef content, according to the Irish safety authority, which said the levels in most samples it tested were “very low.”

Alan Reilly, chief executive of the Irish agency, said the beef doesn’t pose any public health concerns. There is no clear explanation for the presence of the horse DNA, he said.

Aldi said in a statement on its website today that it has withdrawn three burger products from sale in the U.K. “as a purely precautionary measure.” The discounter pulled eight- packs of its Oakhurst burgers from stores in Ireland yesterday.

Aldi, Lidl

Iceland said it withdrew two quarter-pound burger lines implicated in the Irish study. Lidl said it has removed the affected products from sale and will offer refunds. Dunnes Stores didn’t respond to an e-mail seeking comment.

The affected products -- the Everyday Value frozen beef burger and a frozen quarter-pound burger from Tesco’s mid-tier range -- were supplied to the grocer by Silvercrest Foods, a unit of ABP Food Group, a Tesco spokeswoman said.

The recall could “ harm Tesco’s re-launched Everyday Value brand,” Jon Copestake, an analyst at the Economist Intelligence Unit. “The pork DNA also raises questions for religious purposes.”

’Immediate Action’

In addition to Silvercrest, the Irish food safety authorities said horse DNA was found in burger products produced by Ireland’s Liffey Meats and Dalepak Hambleton in the U.K.

Silvercrest and Dalepak said today they are investigating two suppliers in continental Europe “who are the suspected source of the product in question.” The companies said in statements that they have taken “immediate action to isolate, withdraw and replace all suspect product.” Liffey didn’t immediately release a comment.

For Tesco, the news represents “unwelcome publicity,” said Gulliver at Espirito Santo. Domestic same-store sales at the Cheshunt, England-based grocer just began rising again after declining for six of the previous seven quarters.

“Tesco and the discounters have had a strong run recently and part of that is because they have been very successful painting an image of value lines as being cheaper, but not necessarily lacking in quality, so a story like this is really quite damaging,” said Piner at Conlumino.

--Editors: Celeste Perri, David Risser

To contact the reporter on this story: Paul Jarvis in London at pjarvis@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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