Tesco Will Spend $1.6 Billion to Boost Ailing U.K. Stores
Tesco Plc (TSCO), the U.K.’s largest retailer, said it will invest 1 billion pounds ($1.6 billion) to revive sales at home, while slowing expansion in other parts of the world as it makes a domestic turnaround its first priority.
U.K. stores will be given a “warmer look and feel,” while the company will also add 8,000 supermarket workers, and pump 150 million pounds into expanding its online offer, Cheshunt, England-based Tesco said today as it reported a 1.3 percent gain in full-year earnings that matched analysts’ estimates.
Chief Executive Officer Philip Clarke unveiled the plan three months after Tesco cut profit guidance for the first time in 20 years. The retailer’s shares are the second-worst performer this year in the U.K. benchmark FTSE 100 Index. (UKX) Tesco also said today it will add about 38 percent less selling space in the U.K. this year and scale back expansion in Asia, the U.S. and Europe.
“It’s quite clear that they need to spend money on the stores, they need to make them look more attractive,” Richard Perks, a retail analyst at Mintel International, told Bloomberg Television’s “The Pulse.” “They’re looking old and dowdy and tired, and consumers don’t like that. This amount of money really ought to be enough.”
Tesco fell 2.2 percent to 321.05 pence in London trading, extending this year’s decline to 20 percent.
The retailer said 430 supermarkets, representing more than a quarter of its U.K. selling space, will be revamped this year. Grocery ranges will be overhauled, with the 1 billion-pound Value line due to be relabeled as Everyday Value and more than 2,000 new standard products being introduced by April 2013.
Tesco plans to double its online offering of non-food goods to 80,000 lines by Christmas and will extend its Click & Collect business, where shoppers pick up purchases in store, to 1,600 outlets including Express convenience stores.
“The plan isn’t radical, but it’s a radical change of pace,” Clarke said on a call. Trials have demonstrated improved same-store sales, he said, without being more specific.
“We remain confident of making modest progress this year despite the substantial planned revenue investment,” the CEO said. He wouldn’t be drawn on a timescale for a U.K. turnaround, though Bryan Roberts, an analyst at Kantar Retail in London, estimated it would take “18 months minimum.”
Big Price Drop
Tesco’s plan is aimed at regaining lost market share after its Big Price Drop discounting campaign failed to win back shoppers drawn away by price-matching programs at competitors such as Wal-Mart Stores Inc. (WMT)’s Asda and J Sainsbury Plc. (SBRY) The grocer’s share of U.K. grocery spending slipped to 30.2 percent in the 12 weeks ended March 18, according to Kantar Worldpanel data, as sales growth of 2.7 percent trailed behind that of Asda, Sainsbury and William Morrison Supermarkets Plc. (MRW)
“It does not know in marketing terms how to combat the Asda strategy,” Mintel’s Perks said.
A decline in Tesco’s same-store revenue worsened in the final quarter, today’s figures showed. Sales at U.K. stores open at least a year fell 1.6 percent, excluding fuel and value-added tax, worse the previous quarter’s 0.9 percent drop. The median estimate of four analysts was for a 1.7 percent decline.
Tesco pushed back the break-even forecast for its U.S. Fresh & Easy chain by one year to fiscal 2013, and said it will focus on making the existing 185 stores in the country profitable before expanding the business further.
“I was quite prepared to think it wouldn’t work, but I’m not in that place now,” Clarke said of U.S. unit, which posted a loss of 153 million pounds in the last fiscal year. “We’ll be able to push it over the line.”
Tesco also said it would take a “more cautious approach” in China, opening 16 stores this year, instead of stepping up the pace of expansion as intended, due to slowing economic growth, high inflation and wage cost pressures.
Capital spending will be reduced by 500 million pounds to 3.3 billion pounds this year, the grocer said.
So-called trading profit increased 1.3 percent to 3.76 billion pounds in the 52 weeks ended Feb. 25, Tesco said. That’s in line with the 3.77 billion-pound median estimate of seven analysts compiled by Bloomberg and follows Tesco’s January forecast that profit would be at the low end of the range.
Clarke dismissed suggestions that large-format hypermarkets are a dead format.
“The future of the hypermarket is going to be a little bit more food, with general merchandise and clothing,” he said. “This is about responding to the internet and customers rather than saying the hypermarket is over, which it isn’t.”
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