April 10 (Bloomberg) -- Tesco Plc needs to invest as much as 1 billion pounds ($1.6 billion) to turn around its flagging U.K. business, a process which may take as long as three years, according to the U.K. retailer’s fourth-largest shareholder.
In addition to the “significant” sum required, the supermarket chain needs to provide clarity on where the money is being spent, the returns expected and how the grocer measures its effectiveness, said Richard Black, a fund manager at Legal & General Group Plc in London. The investor owns 3.99 percent of Tesco’s shares, according to data compiled by Bloomberg.
“The critical thing for Tesco is to get themselves back on the front foot and I think that could be quite a material investment,” Black said. The retailer should also consider reining in spending on ventures which don’t align with its core grocery business, he said by phone. Tesco announced last week that it was closing Tesco Cars, its used car unit, after a year because it couldn’t offer “a satisfactory range of vehicles.”
The U.K.’s largest retailer has promised a year of investment to lower prices, add staff and improve stores, products and fresh food as it seeks to revive sales growth that is trailing the market. Tesco shares have fallen 20 percent this year, the worst performer in the benchmark FTSE 100 Index, as investors balked at Christmas sales that missed estimates and it forecast “minimal” profit growth in 2013.
Restoring U.K. profit margins to last year’s 6.14 percent will be a “multi-year process” after the domestic division was “neglected” for several years, according to Black.
Tesco spokesman Tom Hoskin said the company stays close to investors and knows what they expect of the grocer. The chain will set out its plans in more detail later this month.
“The investment required is materially ahead of a couple of hundred million and if it is a small amount we will be very skeptical if it can get any traction at all because it appears to us the issues are long running,” Black said.
Warren Buffett’s Berkshire Hathaway Inc. is Tesco’s biggest shareholder with 5.08 percent, followed by BlackRock Inc.’s 4.96 percent holding and Norges Bank’s 4.01 percent.
Tesco is due to report full-year earnings on April 18. Revenue at the Cheshunt, England-based company rose 2.7 percent in the 12 weeks ended March 18, trailing an industrywide increase of 4 percent, according to Kantar Worldpanel data.
Since January, the grocer has replaced its 1 billion-pound Value range with the Everyday Value label and announced plans to add 20,000 staff, including a team in green uniforms at its fresh-food aisles. Chief Executive Officer Philip Clarke has assumed responsibility for the largest U.K. unit, after Richard Brasher announced he will leave the company in July.
“I don’t think there are any surprises so far in what’s being done,” Jon Copestake, retail analyst at the Economist Intelligence Unit, said of the changes, citing a focus on fresh food at smaller competitor William Morrison Supermarkets Plc and updates to own-brand ranges at Wal-Mart Stores Inc.’s Asda.
Tesco stores are “a bit dour, a bit 1990s,” Black said. “Morrison feels much more like an interactive experience.”
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