June 13 (Bloomberg) -- Zdena Pechotova passes the Tesco Plc store in Prague’s Narodni Street most days on her way to the office. She rarely stops for long.
“I come here for lunch or when I need just a few things, because it’s on the way to work,” the 36-year-old secretary said just outside the store. “But I won’t do a big shop here because it’s more expensive, and the food isn’t that great.”
After hemorrhaging sales at home and admitting defeat in the U.S., where Tesco is said to be in talks to sell its Fresh & Easy unit to Ron Burkle, the largest U.K. retailer faces an exodus of shoppers from the Czech Republic to South Korea.
Same-store sales fell in 8 of Tesco’s 10 international markets in the first quarter, hurting the unit that makes up about a third of revenue and profit. Citigroup Inc. estimates Tesco’s earnings will drop for each of the next three years after falling for the first time in two decades in 2012.
“It seems to have gone all wrong simultaneously,” said Paul Mumford, a Tesco shareholder who helps oversee 850 million pounds ($1.3 billion) for Cavendish Asset Management in London. “They’ve got to fight to get it right on a lot of different fronts.”
Last week’s results illustrate how the grocer, based in Cheshunt, England, can no longer rely on international gains to combat weakening sales at home. A 4.6 percent drop in same-store sales outside the U.K. was the steepest since at least 2009. Tesco Chief Executive Officer Philip Clarke last week said it would take him “a very, very long time,” before he would consider exiting Poland and other poor performers. A Tesco official yesterday declined comment beyond Clarke’s statements.
“International is failing and is not the growth engine it once promised to be,” Dave McCarthy, an analyst at Investec Securities in London, said in a June 5 note. “After 15 years in some countries, Tesco is still destroying shareholder value, but refuses to countenance withdrawing.”
Carrefour SA and Royal Ahold NV have exited overseas markets in the past year to focus on sales at home. While Tesco quit Japan in 2012 and is leaving the U.S. just five years after its arrival, it is still present in 10 countries outside the U.K. The retailer’s international profit slumped 22 percent to 990 million pounds in the 12 months ended in February.
Clarke is already struggling to revive domestic same-store sales, which have fallen for 7 of the last nine quarters despite 1 billion pounds of investment in stores, food upgrades and staff training since last year.
Tesco shares fell 0.8 percent to 339.9 pence in London today, trimming their gain this year to 1.2 percent.
The grocer’s scale in most of its international markets means its problems can be fixed, according to Richard Marwood, who helps oversee 554 billion euros ($730 billion) at Axa Investment Managers in London and holds Tesco stock.
“International as it is now doesn’t feel like the problem that the U.S. was,” Marwood said, referring to Tesco’s plan to quit the 200-store Fresh & Easy chain after failing to stem losses. In other markets, “they’ve got the scale of the business and the flexibility to roll with the punches.”
A key reason for Tesco’s international struggles is that it has too many large suburban stores at a time when city shoppers in many countries want the convenience of buying closer to home, said Rahul Sharma, managing director of Neev Capital in London.
“People just don’t do the big shops the way they do it here, plus they can’t really afford to drive to the big stores,” Sharma said. “Carrefour and Wal-Mart are also struggling in these markets. They all bet on the wrong format.”
Tesco’s Central European and Turkish stores are also more expensive than many rivals, said David Gray, an analyst at researcher Planet Retail in London.
“Tesco hasn’t reacted quickly enough to discounters,” Gray said.
Prague shopper Marie Kavkova agrees.
“Tesco has gone down,” Kavkova, a retired 64-year-old, said outside the grocer’s store in the city’s Smichov district. Tesco is no better than the rival Albert chain, “and yet it’s more expensive,” she said.
Products from beer to mineral water and cream cheese are cheaper at Albert’s store in central Prague than at a nearby Tesco store. A 0.5 liter bottle of Gambrinus lager costs 15.80 koruna ($0.82) at Tesco and 14.90 koruna at Albert, while a 500 gram box of Barilla pasta sells for 44.40 koruna at Tesco compared with 33.90 koruna at Albert, owned by Royal Ahold NV.
Tesco’s Czech same-store sales fell 9 percent in the first quarter, the weakest of the grocer’s overseas markets with the exception of Turkey, where sales plunged 16 percent.
Tesco’s Turkish pricing and promotional strategy “wasn’t quite right” in the quarter, CEO Clarke said June 5, causing the grocer to lose ground to market-leading discounter Birlesik Magazalar A.S. A shift by Turkish shoppers toward local stores also means hypermarkets “are currently not the strongest performers,” Clarke said.
In Poland, Tesco’s same-store sales fell 8.2 percent in the first quarter. That compared with an 8.8 percent increase reported by discount chain Biedronka, owned by Portugal’s Jeronimo Martins.
In its biggest international market, South Korea, large stores last year were ordered to close two days a month, a move aimed at helping traditional retailers. Same-store sales fell 5.1 percent in South Korea in the first quarter. In China, they dropped 4.9 percent amid consumer concern over bird flu and weaker demand for pork following a national food safety scare.
Tesco last year closed five stores in China and said April 19 it was “taking a more cautious stance” there.
To contact the editor responsible for this story: Celeste Perri at email@example.com