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Tesco boss hails end of 'space race' as profits crash Tesco boss hails end of 'space race' as profits crash
(5 months later)
Tesco boss Phil Clarke has put the brakes on the group's UK expansion as he revealed a plunge of more than 50% in the grocer's annual profits and brought the curtain down on its US Fresh & Easy chain in a move which will cost the retailer £1.2bn.Tesco boss Phil Clarke has put the brakes on the group's UK expansion as he revealed a plunge of more than 50% in the grocer's annual profits and brought the curtain down on its US Fresh & Easy chain in a move which will cost the retailer £1.2bn.
The huge fall in profits – largely as a result of £2.4bn in one-off charges at home and abroad – was the first decline at the UK's biggest supermarket chain for more than two decades. But even without the one-offs underlying profit was down 14.5%.The huge fall in profits – largely as a result of £2.4bn in one-off charges at home and abroad – was the first decline at the UK's biggest supermarket chain for more than two decades. But even without the one-offs underlying profit was down 14.5%.
Clarke is taking the knife to Tesco's UK store expansion plans, slashing growth plans by nearly half. The era of rapid growth – known as the "space race" to open large supermarkets – must come to an end, he said, and attention must be focused on its convenience stores and online business.Clarke is taking the knife to Tesco's UK store expansion plans, slashing growth plans by nearly half. The era of rapid growth – known as the "space race" to open large supermarkets – must come to an end, he said, and attention must be focused on its convenience stores and online business.
The results detailed how 20 years of continuous growth have juddered to a halt as the retailer has run into problems in the UK and overseas. The UK chain has lost customers to rivals ranging from Waitrose to Aldi and has been forced to embark on a "Build a Better Tesco" revamp, trying to improve service, sharpen prices and improve stores. It international operations are also stuttering in many countries, with growth in China slower than expected, the South Korean chain hit by new rules on trading hours and European outlets affected by the the economic downturn.The results detailed how 20 years of continuous growth have juddered to a halt as the retailer has run into problems in the UK and overseas. The UK chain has lost customers to rivals ranging from Waitrose to Aldi and has been forced to embark on a "Build a Better Tesco" revamp, trying to improve service, sharpen prices and improve stores. It international operations are also stuttering in many countries, with growth in China slower than expected, the South Korean chain hit by new rules on trading hours and European outlets affected by the the economic downturn.
In the UK, the total cost of scrapping town centre developments, store extensions, development projects and distributions centre closures will be £804m. Some 176 sites that would have been turned into superstores will no longer be developed.In the UK, the total cost of scrapping town centre developments, store extensions, development projects and distributions centre closures will be £804m. Some 176 sites that would have been turned into superstores will no longer be developed.
The writedowns, which also included £115m set aside to cover claims for mis-sold payment protection insurance on Tesco loans, sent full year pretax profits down from £4bn to £1.96bn, on sales of £72.4bn worldwide. In the UK, sales were up by 1.8% to £48.2bn, but UK trading profit was down 8.3% to £2.27bn. Across the group underlying profit was down 14%.The writedowns, which also included £115m set aside to cover claims for mis-sold payment protection insurance on Tesco loans, sent full year pretax profits down from £4bn to £1.96bn, on sales of £72.4bn worldwide. In the UK, sales were up by 1.8% to £48.2bn, but UK trading profit was down 8.3% to £2.27bn. Across the group underlying profit was down 14%.
"It's very easy with hindsight to look back and say we could have done something different, but it's taken us a good year to look hard and realise that investment was needed in the UK and to feel the way the internet is starting to change everything," Clarke said."It's very easy with hindsight to look back and say we could have done something different, but it's taken us a good year to look hard and realise that investment was needed in the UK and to feel the way the internet is starting to change everything," Clarke said.
Around 150 convenience stores are still expected to be opened over the coming year, and around 600 schemes are in the pipeline – mostly Tesco Express convenience stores. However, this is around 40% fewer than previously planned.Around 150 convenience stores are still expected to be opened over the coming year, and around 600 schemes are in the pipeline – mostly Tesco Express convenience stores. However, this is around 40% fewer than previously planned.
Around 110 schemes where Tesco has invested in land will not go ahead, including 16 that will cost the company around £300m to exit. Around 40 plots of land next to existing stores which bosses had hoped to expand in to will be sold.Around 110 schemes where Tesco has invested in land will not go ahead, including 16 that will cost the company around £300m to exit. Around 40 plots of land next to existing stores which bosses had hoped to expand in to will be sold.
The retailer has also taken a £70m hit from onerous leases, and distribution centre closures in Harlow and Weybridge cost £30m.The retailer has also taken a £70m hit from onerous leases, and distribution centre closures in Harlow and Weybridge cost £30m.
Seven town centre developments, where Tesco has bought part of a high street to develop, will be scrapped, and 23 stores have lost a significant chunk of their value because they were bought before the financial crisis.Seven town centre developments, where Tesco has bought part of a high street to develop, will be scrapped, and 23 stores have lost a significant chunk of their value because they were bought before the financial crisis.
However, Tesco still has a property portfolio of £20bn and overhauled 25% of its stores, in particular its meat, fish and bakery sections.However, Tesco still has a property portfolio of £20bn and overhauled 25% of its stores, in particular its meat, fish and bakery sections.
In the US, the disastrous Fresh & Easy venture is over at a cost of £1bn on writedown costs, and a further £200m of operating losses for the year. Some analysts have estimated the Fresh & Easy debacle will have cost Tesco around £3bn in total. The UK retailer had hoped to take on the mighty US Wal-Mart chain in its own backyards and build a chain of 1,000 stores on the US west coast, but the stores failed to attract enough shoppers.In the US, the disastrous Fresh & Easy venture is over at a cost of £1bn on writedown costs, and a further £200m of operating losses for the year. Some analysts have estimated the Fresh & Easy debacle will have cost Tesco around £3bn in total. The UK retailer had hoped to take on the mighty US Wal-Mart chain in its own backyards and build a chain of 1,000 stores on the US west coast, but the stores failed to attract enough shoppers.
Chief finance officer, Laurie McIlwee, said discussions are continuing in a hope to sell the business, with Germany's Aldi and the US Trader Joe's operation thought to be interested.Chief finance officer, Laurie McIlwee, said discussions are continuing in a hope to sell the business, with Germany's Aldi and the US Trader Joe's operation thought to be interested.
He said: "I'm pleased after such a short period of time we've attracted such a lot of interest.He said: "I'm pleased after such a short period of time we've attracted such a lot of interest.
"There are a large number of organisations that want to buy the entire Fresh & Easy company and it's those businesses we are focusing our attentions on because plainly they will be the ones that will be more straightforward."There are a large number of organisations that want to buy the entire Fresh & Easy company and it's those businesses we are focusing our attentions on because plainly they will be the ones that will be more straightforward.
I think another three months we'll be able to either give you an update or reveal a buyer."I think another three months we'll be able to either give you an update or reveal a buyer."
Clarke admitted the US business had been a disappointment.Clarke admitted the US business had been a disappointment.
He refused to blame Sir Terry Leahy for the retailer's problems. He said he had been left a "great legacy" by his predecessor and added: "My job isn't to look back and apportion blame to anybody but there are huge lessons for the organisation."He refused to blame Sir Terry Leahy for the retailer's problems. He said he had been left a "great legacy" by his predecessor and added: "My job isn't to look back and apportion blame to anybody but there are huge lessons for the organisation."
On the failure of Fresh & Easy, which opened in 2007, he said: "We could have carried on for a few more years but it would have taken too long to get to profitability. I think the big lesson is when you can't see a return in a reasonable time frame, as the chief executive it's your responsibility to call an end to it and go spend your energy and invest your shareholders money in other things."On the failure of Fresh & Easy, which opened in 2007, he said: "We could have carried on for a few more years but it would have taken too long to get to profitability. I think the big lesson is when you can't see a return in a reasonable time frame, as the chief executive it's your responsibility to call an end to it and go spend your energy and invest your shareholders money in other things."
Clarke blamed the PPI mis-selling on the bailed-out Royal Bank of Scotland, when Tesco Bank was part of a joint venture, but said the bill, which has now reached £222m, could not be passed on to RBS.Clarke blamed the PPI mis-selling on the bailed-out Royal Bank of Scotland, when Tesco Bank was part of a joint venture, but said the bill, which has now reached £222m, could not be passed on to RBS.
He added that they would be launching current accounts for the first time from next year - four years later than planned.He added that they would be launching current accounts for the first time from next year - four years later than planned.
On the horsemeat scandal, which hit Tesco harder than most after horse DNA was found in four products including own-brand burgers and lasagne, Clarke said the impact on sales had been minimal.On the horsemeat scandal, which hit Tesco harder than most after horse DNA was found in four products including own-brand burgers and lasagne, Clarke said the impact on sales had been minimal.
He said: "It was a terrible thing and I never imagined for a minute that food would be subject to that type of fraud, so we took a bit of time to understand the scale of it.He said: "It was a terrible thing and I never imagined for a minute that food would be subject to that type of fraud, so we took a bit of time to understand the scale of it.
"It wasn't great because it knocked our confidence in ourselves for a while and it knocked consumer confidence as well more generally.""It wasn't great because it knocked our confidence in ourselves for a while and it knocked consumer confidence as well more generally."
Some analysts suggested the huge writedowns are an opportunity for Tesco to put the last year behind them and move forward.Some analysts suggested the huge writedowns are an opportunity for Tesco to put the last year behind them and move forward.
Clive Black at Shore Capital said: "Mr. Clarke has had to go backwards to move forwards, reflecting to our minds a more challenged business and more challenging market conditions than his predecessors faced.Clive Black at Shore Capital said: "Mr. Clarke has had to go backwards to move forwards, reflecting to our minds a more challenged business and more challenging market conditions than his predecessors faced.
"To his credit though, he has not shirked difficult decisions that we believe have been necessary to right the 'good ship' Tesco.""To his credit though, he has not shirked difficult decisions that we believe have been necessary to right the 'good ship' Tesco."
However, Andrew Kasoulis at Credit Suisse, cautioned: "They have been trying to clean things up since last January's profit warning but events have conspired against them particularly in Europe.However, Andrew Kasoulis at Credit Suisse, cautioned: "They have been trying to clean things up since last January's profit warning but events have conspired against them particularly in Europe.
"I wouldn't guarantee that everything is completely resolved, but I think there has been remedial action in some areas, in particular the UK. They seem to have much more of an idea of what's going right and what's going wrong and been much more engaged with their customers.""I wouldn't guarantee that everything is completely resolved, but I think there has been remedial action in some areas, in particular the UK. They seem to have much more of an idea of what's going right and what's going wrong and been much more engaged with their customers."
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