Tesco ditches plans for new stores as profits fall by 51pc

TESCO, the UK’s biggest retailer, is to ditch plans to open more than 100 major new stores after announcing its first fall in profits in 20 years.
Philip ClarkePhilip Clarke
Philip Clarke

The world’s third largest store chain also plans to sell off its ill-fated US business Fresh & Easy.

Abandoning the loss-making business will involve £1bn in restructuring and one-off costs.

Hide Ad
Hide Ad

Tesco also wrote down the value of its UK property by £804m and its Polish, the Czech Republic and Turkish operations by £495m.

In a bid to cheer investors, chief executive Philip Clarke pointed out Tesco’s fourth quarter UK performance as its best outcome in three years following a huge investment.

“I’ve been working for Tesco for nearly 40 years and I can tell you this – it already looks, feels and acts like a different and a better business,” said Mr Clarke.

However, the most recent three-month sales period represented a slowdown in growth since Christmas.

Hide Ad
Hide Ad

Fourth quarter UK like-for-like sales rose 0.5 per cent, which was a slowdown on the 1.8 per cent growth reported in the six weeks to January 5.

The decision to scrap plans for over 100 big store developments follows a move to online sales.

It is expected that a number of Tesco Extra developments will be cancelled, although the company did not disclose which sites would be affected.

“The large stores we have are great and we are doing a lot of work to make them more vibrant and relevant for today’s customers, but we won’t need many more of them because growth in future will be multichannel – a combination of big stores, local convenience stores and online,” said Mr Clarke.

Hide Ad
Hide Ad

Analyst Philip Dorgan, at Panmure Gordon, said Tesco’s store development U-turn was a “welcome shift in strategy”.

“The space race is over. The digital race is on,” he said.

“It will take time – retail is detail – but we believe that Tesco is on track and we expect recovery in the UK to slowly emerge in 2014.”

The group’s pre-tax profits fell 51.5 per cent to £1.96bn in the year to February 23 as a result of slower sales growth and the massive writedowns which added up to £2.3bn.

The hefty write-downs followed the group’s decision to buy land at the height of the property boom several years ago.

Hide Ad
Hide Ad

“That is before the 2008 financial crisis, before the iPhone, social media, tablet computers, before we knew how profoundly technology would change both how we and our customers live and shop,” said Mr Clarke.

On an underlying basis, pre-tax profits fell 14.5 per cent to £3.5bn.

Fresh & Easy, which has 199 stores, has absorbed over £1bn in capital since its launch in 2007 when Tesco was run by Clarke’s predecessor Terry Leahy.

It has never made a profit.

“My job is not to look back and apportion blame,” said Mr Clarke. “It’s a huge lesson for the organisation.”

Hide Ad
Hide Ad

Fresh & Easy was put under review in December when Mr Clarke said a sale was likely.

Tesco’s finance director Laurie McIlwee said the group has received “a lot of interest” in Fresh & Easy, both for the whole business and for batches of stores.

“What we’re most interested in is those buyers that are interested in buying the complete business,” he said, adding that a clean sale would negate redundancy and leasehold issues.

A sale is likely in the summer.

The group is paying a dividend of 14.76p.

Tesco cut its store expansion by 40 per cent over the year. A focus on the new growth area of convenience stores resulted in the opening of 120 Tesco Express and 26 One Stop outlets and this will continue this year.

Hide Ad
Hide Ad

Internet shopping has had a significant impact on the grocery sector, with many customers shunning stores to shop from home.

Tesco’s online sales have reached the £3bn milestone, rising 13 per cent over the year.

Supermarket broadens its empire

Tesco is hoping to improve the shopping trip through brand relaunches, store makeovers and hiring more staff.

It has bought the 47-store Giraffe child-friendly restaurant chain for £48.6m under plans to open the eateries alongside larger stores and transform them into family-friendly retail destinations.

Hide Ad
Hide Ad

The deal follows recent similar investments in the Harris + Hoole coffee shop chain and Euphorium Bakery.

Tesco’s chief executive 
Philip Clarke said sales over 
the past few months had 
been impacted by the horse meat scandal as customers steered clear of frozen meat products.

Tesco had to withdraw four products from sale amid the crisis, but said the effect on overall sales was minimal and stressed that trading was now “back to normal”.

The group’s financial arm, Tesco Bank, also became the latest player to increase its bill for compensation claims relating to mis-selling of payment protection insurance (PPI), up from £30m in the half-year to £115m.

Hide Ad
Hide Ad

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said investors were “not entirely convinced” by the group’s turnaround plans.

He added that it will be a “slow process before the company can hope to recapture its former glories”.

Tesco has been in recovery mode since falling market share and intense competition prompted the chain’s first profits warning in 20 years in January 2012. That forced Mr Clarke, who started his career stacking shelves in Tesco, to unveil a £1bn overhaul plan in April last year.

A year on from launching the fightback, Mr Clarke said he was pleased with the progress in the UK, although trading profits in the UK business fell 8.3 per cent to £2.3bn in the year to February 23.

Hide Ad
Hide Ad

UK like-for-like sales fell 0.4 per cent excluding VAT and fuel over the year.

This was despite buoyant Christmas trading after a five per cent fall in general merchandise sales weighed on its performance.

Difficult trading in Korea and the eurozone also left international profits lower, down 10.3 per cent in Asia and 37.8 per cent in Europe.

The group wrote down the value of its businesses in Poland, the Czech Republic and Turkey by £495m.

Related topics: