Tesco Haunted by Leahy Ambitions as Grocer Prepares to Exit U.S.

Tesco Haunted by Leahy Ambitions as Grocer Prepares to Exit U.S.
Customers carry Tesco Plc branded shopping bags as they leave one of the company's stores in London. Photographer: Simon Dawson/Bloomberg

In more than a decade as chief executive officer of Tesco Plc, Terry Leahy prided himself on the creation of an international business that grew to become a third of sales. His successor is starting to dismantle it.

Philip Clarke, who replaced Leahy at the helm of the U.K.’s largest retailer last year, said yesterday that the Cheshunt, England-based company will likely exit the U.S., in which Tesco has invested 1 billion pounds ($1.6 billion) and which hasn’t made a profit since it was formed in 2007. Tim Mason, who built Fresh & Easy from scratch under Leahy, was ousted.

“Terry Leahy definitely left at the right time and Phil Clarke’s life is a lot more difficult because of that,” said Matt Piner, a retail analyst at Conlumino in London. “He took over a business that had reached its peak and begun to fall back so he has to take bold moves to get it on the right path.”

Without the distraction of a struggling U.S. business, Clarke can focus most of his attention on reviving growth in the U.K. In addition to halting U.S. losses, Clarke needs to find ways of restoring same-store sales growth in its domestic market, which has fallen in all but one of the quarters since he took the helm. He’s investing 1 billion pounds to upgrade U.K. stores, add new products and hire additional staff and even that amount may not be enough, said Caroline Gulliver, an analyst at Espirito Santo.

During the former CEO’s 14 years in charge, Tesco doubled its home market share and became the world’s fourth-biggest retailer. Leahy said in 2010 he was certain that Fresh & Easy would be a financial success when the U.S. economy recovered. The following year he said competitor Carrefour SA made a mistake in entering too many international markets.

Scale Required

“We resisted the temptation to rush everywhere,” Leahy said at the time at an emerging markets summit in London.

Now those words are returning to haunt a company which already this year has paid 40 million pounds to exit Japan, a country that it entered during Leahy’s stewardship in 2003.

In neither the U.S. nor Japan was Tesco able to achieve its ambition of gaining the number 1 or 2 position, unlike the U.K., where it still controls more than 30 percent of grocery spending, or South Korea, its biggest overseas market.

Retailers need to gain scale to succeed internationally, according to Kate Calvert, an analyst at Seymour Pierce in London. In the U.S., Tesco’s 199 Fresh & Easy stores compete against Aldi-owned Trader Joe’s and Whole Foods Market Inc., while in Japan it left the market with 0.1 percent share.

Carrefour, Metro

“The issue retailers should have learned is that planting flags isn’t the way to create international businesses,” Calvert said. “They are victims of trying to do too much. In the new world you have to watch and preserve your cash flow.”

Tesco now gets more than a third of revenue from outside of its domestic market, compared with more than half for Carrefour, France’s largest retailer, which this year has announced deals to pull out of Colombia, Indonesia, Malaysia and Greece.

Like Tesco, Carrefour is struggling to address weak consumer spending and declining sales at home. It’s a similar situation at Metro AG, Germany’s largest retailer, which last month agreed to sell its Real grocery stores in eastern Europe, less than two months after lowering its 2012 profit forecast.

“You have to be able to afford international expansion,” said Boris Planer, chief economist at Planet Retail in Frankfurt. “It requires a strong profitability in the home market. It is something that Metro doesn’t currently enjoy in Germany and it is something that Tesco doesn’t currently enjoy in the U.K. Fixing home-market operations is a priority.”

Bad Timing

Fresh & Easy was let down by poor execution, clinical stores, a predominance of own-brand products in a brand-loving U.S. market, and a lack of understanding by consumers, according to Natalie Berg, an analyst at Planet Retail in London.

“They never had a clear proposition,” Berg said. “Was it a discounter, was it a health-food store?”

In addition to the money invested in the unit, Fresh & Easy has incurred losses of 713 million pounds since its formation.

To be sure, Tesco entered the U.S. immediately before the crisis caused by the collapse of Lehman Brothers Holding Inc.

“Tesco was very unlucky in the U.S.,” said Daniel Lucht, an analyst at Research Farm in London said. “They went there at a time when everything was booming, but then came the financial crisis and it definitely had a big impact.”

Tesco said yesterday that approaches were made in recent months for all and part of Fresh & Easy, which has stores in Nevada, California and Arizona.

According to Berg, the business is likely to be broken up piecemeal, with Trader Joe’s, Dollar General Corp., and some drugstore chains possibly interested in taking over outlets.

For Clarke, exiting the U.S. won’t be the end of his difficulties as he battles to fend off competition at home from discounters such as Aldi and upscale chains like Waitrose.

“Growth is going to slow down in the domestic market and it’s also not as good as it used to be abroad,” said Lucht.

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