18/04/2012 07:28 BST | Updated 17/06/2012 10:12 BST

Tesco: Where Did It Go Wrong?

Tesco saw £5bn wiped from its share price earlier this year after the supermarket giant warned on profits for the first time in two decades.

But while investors were given a rude awakening by the grim Christmas trading update, a failure to invest in pricing and store standards meant Tesco had begun to lose its way in the eyes of shoppers long before.

The business, started by Jack Cohen as a market stall in the East End of London in 1919, enjoyed a meteoric rise in the past two decades as it overtook a struggling Sainsbury's to become the nation's biggest retailer.

However, its performance in the UK since the financial crisis has been weaker, as its lead has been eroded by resurgent rivals Sainsbury's, Asda and Morrisons, while German discounters Aldi and Lidl have shaken up the market.

Despite its immense buying power, price surveys found it was often not the cheapest supermarket and price guarantees from Asda and Sainsbury's in recent months have further hurt sales.

Tesco's latest attempt to draw more people into its stores - its £500 million Big Price Drop - flopped partly because it was funded by a reduction in the number of points awarded through its Clubcard loyalty scheme.

Its share of the grocery market earlier this year dipped below 30% for the first time since 2005.

Analysts believe Tesco is guilty of having used its dominant position in the UK grocery sector to fund its expansion into overseas markets such as the US, Thailand and China.

While it was being undercut on price by rivals, standards in its stores fell behind as a lack of investment left them looking jaded and the numbers of staff were cut to maximise profits.

Tesco, critics argue, spread itself too thin and let its standards drop as a result.

Darren Shirley, an analyst at Shore Capital, said: "The general consensus is that three or four years ago, they took their eye off the ball in the UK and started to focus on overseas and financial services.

"Some of the profitability and cash flow was diverted from the UK and service standards slipped, hence their stores have become quite sterile, dull and clinical."

He said Tesco has also suffered since the financial crisis because it sells a lot of non-food items such as TVs, which have seen demand fall drastically.

Chief executive Philip Clarke has announced plans to invest in stores and staff in a bid to turn the business around.

But analysts say Tesco needs to return to the days when it was at the forefront of innovation and led the way by rolling out new concepts such as its Clubcard and its value and premium own label ranges, which helped it take the grocery market by storm.