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TWST: Could we talk about the stocks specifically that you’re recommending to your clients: what’s your top pick?

Mr. Dennis: One that has performed very strongly and we still think has some way to go is Tesco. It is the largest UK dominant player and obviously the most liquid in terms of accessibility to investors. But the key thing you’ve got to understand about Tesco is, not only has it a very strong track record, which in these volatile markets is very attractive to low-risk blue chip type investors. But also the story doesn’t just end with Tesco dominating the UK having strong, stable net margins, a relatively good position in most emerging and developing markets, but also it’s going to come out of that with several dominant market positions in those emerging markets in the years to come. So Tesco in our view can maintain its UK lead and remain the main profit driver for the business; add on the earnings boost from the overseas business; and that cocktail of 11%-12% growth is relatively attractive in the current markets. What people I think have failed to grasp with Tesco is its ability to transfer its knowledge base into other substantially larger markets like the US, and I think where that develops is where the remainder of Tesco’s up side in its share price will come from. There is enormous opportunity for a very low capital investment entree into the US market via joint ventures, spearheaded through an e-commerce business model like Tesco’s, which I think is proven and could prove very attractive to North American food retailers.

TWST: Can you tell me more about its e-commerce model?

Mr. Dennis: The Tesco Home delivery model is based on the fact that it doesn’t require a lot of initial capital and is rapidly scaleable. We estimate Tesco’s total capital cost over three years to develop an in-store pick system was GBP50 million. This is significantly cheaper than a pure depot-based system, or a hybrid one like Sainsbury’s that cost similar in one year. So Tesco having rolled out home delivery to 260 stores, has managed to sign-up a lot of households at a relatively low cost. Tesco’s total capital investment in trial, development and roll out is relatively small compared to, say, spending GBP15 million build cost of a supermarket. Apart from the capital base the key thing to focus on in the model is the customer’s GBP5 fee for delivery, which the consumer views as good value for service and retailer sees as enhanced margin. Basically if you’re selling the same price items on-line as you are in-store, and you’re selling the total range so there’s no compromise to customer choice, all you have to do then is develop a low cost accurate supply chain. That is what Tesco have managed with their in-store systems, with their picking process, with their packing and scheduling of deliveries. Add to this continuous scheduling and replenishment and you have a model that churns out a 10% store level margin, which is much more attractive than the 7%-8% supermarket EBITDA margin.