£1bn plan to put the heart and soul back into Tesco

TESCO is to invest £1bn in its core UK business in a bid to lure back shoppers with new store formats, an increase in staff numbers, better quality and more price cuts.

The group, the world’s third biggest retailer, shocked the market in January with its first profits warning in over 20 years.

Yesterday chief executive Philip Clarke admitted the supermarket chain had been spread across too many areas, such as cars and home services, which diluted the brand and cost time and money. It has now stopped serving these areas.

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“We fully recognise that we need to raise our game in the UK,” he said.

“The business is far from broken, but it is not as good as it could be. Good enough is not good enough.”

The group has already revamped 200 stores and said sales over the 17 weeks since the work finished has led to an improvement in like-for-like sales at these pilot stores.

Some 8,000 new staff will go into 750 stores in a bid to improve customer service.

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Mr Clarke said the group plans to make less profit out of each UK store as it puts “more staff in, more branding, more quality and more value-for-money”.

“I’m announcing our £1bn plan to put the heart and soul back into Tesco,” said Mr Clarke.

“The plan isn’t radical, isn’t a radical change of direction, but it’s a radical change of pace.”

Tesco has reduced expansion plans for its UK chain, particularly of large out-of-town hypermarkets, as it focuses on improving trading at its existing stores.

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The group plans to open 38 per cent less selling space in the UK in its 2012-13 financial year than in 2011-12.

This will help to reduce capital spending for the group as a whole to £3.3bn from £3.8bn in 2011-12.

Tesco’s shares, which have fallen 22 per cent over the past six months, fell two per cent yesterday, a fall of 7p to 321.25p.

The group reported a small increase in full-year profits that met market expectations and analysts were relieved there was no second profits warning.

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Tesco said pre-tax profits rose 1.6 per cent to £3.9bn in the year to February 25.

Like-for-like UK sales fell 1.6 per cent in the final quarter, an improvement on the 2.3 per cent fall over Christmas.

Tesco said it was comfortable with latest market consensus profit forecasts for 2012/13.

Of the £1bn, £200m will be spent on staff and services, putting 8,000 more staff in existing stores, mainly in fresh food departments.

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Some £200m will be spent on online retailing, including the roll out of Click & Collect and transforming the range.

A further £200m will be spent on refreshing the stores, introducing a warmer look and feel.

The remaining £400m will go on marketing, relaunching the Tesco brands and improving quality, and better prices and promotions with more personalised offers.

The group will revamp 430 British stores, or 25 per cent of its UK selling space this year.

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Since the January profits warning, Mr Clarke has announced plans to hire 20,000 more staff in the UK and relaunched the firm’s budget food range.

In March, he also jettisoned the head of the UK business, Richard Brasher, to take control of the turnaround plan himself.

Philip Dorgan, retail analyst at Panmure Gordon stockbrokers, said the plan looked coherent but warned that its success depended on Tesco “doing 1,000 things one per cent better”.

Himanshu Pal, senior Tesco analyst at retail insight business Kantar, added that Mr Clarke faced a daunting challenge but that his strategy was likely to help the market leader get back on track.

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“Those expecting an overnight recovery will be disappointed. It only takes one shopping trip to disappoint a customer, but it takes much longer to change perceptions and regain shoppers’ trust,” he said.

The Fresh & Easy business in the US racked up further losses of £153m. Tesco, which previously hoped it would break even by the end of the current year, warned this process will take longer after it scaled back expansion plans.