April 18 (Bloomberg) -- Tesco Plc Chief Executive Officer Phil Clarke’s decision to open fewer big supermarkets in the U.K. marks the end of a space race that has defined the country’s largest retailer for the past two decades, leaving online sales as his next frontier for growth.
When Tesco amassed the plots of land to develop stores a decade ago “the smartphone hadn’t been invented and Internet retailing wasn’t really here, so this change in strategy came about a year ago,” Clarke said at a press conference in London yesterday. “We’re still opening new stores, just not as many as we anticipated back then.”
Tesco said yesterday it will scrap 100 major store developments and wrote down the value of the sites that were acquired five to 10 years ago by 804 million pounds ($1.2 billion) to reflect a drop in property values. Instead, the retailer will focus on expanding its online and convenience-stores as it seeks to address market share losses to discounters such as Aldi and upscale chains including Waitrose Ltd.
“The space race is over,” Philip Dorgan, an analyst at Panmure Gordon in London, said in a note yesterday. “The focus is shifting to online and small store investment.”
Tesco plans to add 1.26 million square feet (117,058 square meters) of shopping space in the U.K. in the coming financial year, down from 1.31 million square feet last year.
Expansion will be led by the Express convenience format, with 367,000 square feet of new space planned, up from 301,000 square feet last year. The amount of new superstore space will fall to 109,000 square feet from 299,000 square feet, Tesco said, while the larger Tesco Extra format will also be reined back to 603,000 square feet from 652,000 square feet.
The company said yesterday that it no longer plans to develop more than 100 property sites, which according to Clarke were bought “before we knew how profoundly technology would change both how we and our customers live and shop.”
The CEO said last month that Tesco has to “become a technology company as well,” and pledged to pump $750 million into the roll-out of online services globally.
Tesco’s online grocery sales increased by 13 percent to 2.3 billion pounds last year, more than 3 percent of group revenue.
“It’s all very easy for Phil Clarke to get excited about the icing that is online shopping, but the cake is not fully baked yet,” said Bryan Roberts, an analyst at Kantar Retail in London. “The reality is that the majority of food shopping is still done in a store, and Tesco has been struggling on that front. It would be wise not to get too distracted.”
Tesco yesterday reported the first drop in annual profit in almost 20 years and said it will exit the unprofitable Fresh & Easy chain in the U.S. as it struggles to maintain its dominant share at home. The Cheshunt, England-based retailer controls 29.4 percent of the U.K. grocery market, down from 30.2 percent a year ago, according to data from researcher Kantar Worldpanel.
While U.K. same-store sales growth in the fourth quarter was the strongest in three years at 0.5 percent, excluding gasoline and value-added tax, it still trailed competitors.
J Sainsbury Plc last month reported a 3.6 percent increase in fourth-quarter revenue on the same basis, while Marks & Spencer Group Plc said last week that U.K. food sales rose 4 percent at stores open at least a year.
Fitch Ratings today downgraded Tesco’s debt to BBB+ from A-because of a “heightened business risk profile as highlighted in its weaker than expected” full-year results. The retailer’s key challenge remains to bolster the U.K. business, while it also needs to improve profit margins in central European markets struggling with the impact of the euro area’s debt crisis, Fitch said. The outlook for Tesco’s rating is stable, according to the ratings company.
Tesco shares fell 0.2 percent to 369.20 pence at 2:53 p.m. in London after yesterday declining the most since Jan. 12, 2012, the day the company cut profit guidance for the first time in years.
The grocer may need to show “firm evidence of a sustained improvement in sales trends and profit progression” for the shares to advance, according to Sam Hart, an analyst at Charles Stanley & Co. with a hold recommendation on the stock.
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