Tesco's sights on world domination as first-half profit tops £1bn

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The Independent Online

Tesco nailed its international colours firmly to the mast yesterday as its quest to be a global retail giant helped it notch up interim profits before tax of £1.1bn - a first for a British retailer.

Sir Terry Leahy, the chief executive, was blunt about the group's prospects overseas, which range from creating a business on America's West Coast to - potentially - entering the Indian market. "At a time when others appear to be faltering in their commitment to international retailing, Tesco is getting stronger," he said as he unveiled the results. The remark was a veiled dig at Wal-Mart, Asda's US owner, which recently announced it was abandoning Germany.

Tesco, which operates in 10 countries outside the UK, may have spent the past month getting British shoppers excited about its big move into selling non-food items online, but it is growing overseas that really gets Sir Terry going. Nothing is off the agenda. Not even changing its tried and tested operating model and franchising its brand to a local partner, which is what it would have to do to gain a foothold in India, according to existing regulation.

Much depends on cracking the US market. Failure there would cost Sir Terry not only his job but would shatter confidence in one of Britain's highest profile companies.

In advance of opening the first Stateside store some time in "late 2007", Tesco has opened an office in El Segundo, on the Santa Monica bay in California, which employs more than 100. It has also acquired land at Riverside, on Los Angeles' eastern boundary, for its first distribution centre. The retailer has plans for hundreds of convenience stores, modelled on its Express format, with plenty of fresh produce to tempt US consumers popping in for that night's dinner away from their diet of giant Doritos grab bags and ready-made salsa.

A tough task, yet yesterday Sir Terry showed not a hint of nerves. "We may still be only in the foothills of our international development, but we have done the really risky bit," he said. By that he means that Tesco has worked out that as long as it can get inside its customers' heads, it can develop the right format to suit that country.

The group was late to the overseas game compared with rivals such as France's Carrefour and Wal-Mart, but has made up for lost time. By the end of this year, 60 per cent of its floor space will be overseas. With the exception of Hungary and Japan, underlying sales grew in all of its overseas markets during its first half.

Where the group has failed - notably Taiwan - it has taken the hit quickly, and moved on (it quit Taiwan in favour of Czech Republic and Slovakia, through a store swap with Carrefour); where it faces difficulties - in Thailand thanks to the uncertainty caused by the recent military coup - it knows it can count on other parts of its business to make up any shortfall.

"Our international business is our biggest opportunity. Both for growth and delivering returns," Sir Terry said. Hence his decision to step up the pace of organic growth and to keep an eye out for potential acquisitions. "Consolidation is picking up. Tesco will play its part at the right price," he added, predicting China could be the next country to see a rush of foreign retailers heading for the exit. Meanwhile, it is opening more Express stores outside the UK - 120 this year - than inside, putting it on track to have more than 1,000 across seven countries by the end of this year.

In the six months to 27 August, Tesco's revenues at actual rates from its Asian businesses rose 22 per cent to £2.3bn, increasing by the same percentage again in the rest of Europe, which excludes the UK, to £3bn. To put even that performance into perspective, its total sales in the UK grew 10.2 per cent to £17.4bn. Group interim profits before tax increased 19.7 per cent to £1.1bn.

Which leaves its home market. For all the potential risks of expanding overseas and sinking £500m into the US market over the next two years, it is in the UK that Tesco sceptics expect the group to trip up. After all, the group's grip on the high street attracted the eye of the country's top competition watchdog this year, unleashing an 18-month inquiry into the £100bn grocery sector. From allegedly bullying suppliers to railroading local authorities to grant it planning permission: you name it, Tesco was chided for it. Even the august Women's Institute played its part in the anti-Tesco drama that has been unfolding since the nation woke up to the fact that the group takes close to £1 in every £7 spent by shoppers.

Despite the backlash, the group's six-month results showed it was powering ahead in the UK, where it managed to pick up the pace of underlying growth in its second quarter. In the half-year, like-for-like sales, excluding petrol, grew 5.5 per cent. "It hasn't been easy, but it has gone well for the simple reason that we have been on good form operationally," Sir Terry said. The group invested £200m in lower prices, driving the cost of shopping at Tesco down 0.4 per cent. Choice, service and availability improved during the period, he added, helping the group to lure customers away from rivals.

To cut waiting times at checkouts, Tesco is rolling out infra-red cameras at its stores that can put till staff on alert to head off big queues. Its adoption of "guideline daily amount" labelling on 4,000 of its products (it will be on all of them by January) has driven sales of healthier options by 30 per cent, and a wider selection of its "Finest" ranges means that sales of those high-margin meals are growing at four times the rate of other products.

Meanwhile, sales of its non-food ranges, recently extended further online, surged 12.5 per cent on a comparable basis to £3.5bn. This included growth of 36 per cent for consumer electronics; 19 per cent for clothing; and 50 per cent for its sports goods. "The potential in non food is huge. We have a sizeable business but we can go further in the UK and overseas," Sir Terry said.

The group's decision to give itself a green makeover this year, pledging £100m for an environmental investment fund and promising to halve the amount of energy used by its stores, among other things, won it valuable PR points - despite Tesco's protestation that this wasn't its objective. Yesterday, it promised to "broaden" the scope of its green commitments early next year, buying it yet more time to keep critics at bay.

Many analysts see the biggest threat to Tesco coming from a revived UK grocery plc. "I can't see how continued recoveries at Sainsbury's, Morrisons, Asda and Marks & Spencer can fail to hurt them long term," Jonathan Pritchard, at Oriel Securities, said.

But Sir Terry was adamant that his focus remained internal, citing "complacency" as his biggest enemy. "Most businesses come down. The trick is how long can you leave the gap between going up and coming down. The danger when you're successful is that you get used to your environment. When that changes, you stop picking up on the signals that things have changed. We have good opportunities for growth, but in the end it will be customers who decide whether we grow or we shrink," he said.

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