18 April 2013

Tesco fails to crack the US market, profit hit by writedowns

UK supermarket giant Tesco is counting the price of failure after taking its eye off the ball domestically in order to pursue ambitious expansion plans overseas. Profits for the country’s largest retailer by sales were all but wiped out, falling for the first time in almost two decades following writedowns of GBP 2,400 million, largely on the value of its failed Fresh & Easy foray in the US and its UK property portfolio.

Ajay Bhalla, professor of global innovation management at Cass Business School, told the BBC that scale is not the be all and end all. "While Tesco paid attention to making its US venture work, the UK retail market evolved quickly. Customer service and quality gained the upper hand over low pricing, and Waitrose and Sainsbury's emerged as the preferable destination for the growing middle-class segment.”

Tesco’s pre-tax profit more than halved to GBP 1,960 million in the year to 23rd February 2013 from GBP 4,038 million in fiscal 2011-12. However, even before the GBP 1,200 million charge to exit the venture in the States and the surprise GBP 804 million property writedown, the company’s underlying profit fell by almost 15 per cent to GBP 3,549 million from GBP 4,149 million a year earlier, reflecting the cost of the retailer’s domestic problems which prompted its shock profit warning in January 2012. Full-year net profit fell to GBP 124 million from GBP 2,806 million in fiscal 2011-12 as Tesco’s bottom line was further dented by charges of GBP 495 million on the value of its central European operation.

Fresh & Easy’s future is likely to grab headline space, especially as Tesco has already received expressions of interest in the US operation from unnamed third parties after kick-starting a strategic review in December last year. The business was launched in Nevada, California and Arizona in late 2007, but Fresh did not turn out to be all that Easy, failing to find the sweet spot in the competitive US grocery market and opening up its first stores at a time when the country’s economy was hitting the skids.

While Fresh & Easy is already being treated as a discontinued operation, it is not yet known what avenue Tesco will take in a bid to exit the loss making US operation. Finance boss Laurie McIlwee told reporters on a conference call the withdrawal process will take at least three months to complete, and noted Tesco is mostly attracted to would-be buyers interested in taking on the complete business rather than selling it piecemeal. However, David Gray, an analyst at Planet Retail, has thrown cold water on these plans, telling Bloomberg that Fresh & Easy is likely to be split between competing suitors.

© Zephyr