UK stalls but tesco turns in £3.5bn with a little foreign help

Tesco's new chief executive promises to do better in the UK and pledges new age of transparency
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The Independent Online

Philip Clarke, Tesco's new headmaster, gave his first public assessment of his UK pupils' performance over the last year yesterday: "can do better". With a candidness that marked a break from the 14 years under his predecessor Sir Terry Leahy, the new chief executive of Tesco also gave its schools in countries, including the US, China and Japan, a list of homework and corrections to bring them up to the grade of the star pupils at businesses in the 14 countries where it operates.

That said, Mr Clarke – a Tesco lifer of 35 years and its head of international and IT before taking the helm last month – also gave top marks to many areas of the sprawling retail giant's operations. More specifically a return to form in continental Europe and barnstorming performances in South Korea, Thailand and Malaysia helped Tesco deliver an 11.3 per cent uplift in pre-tax profits to a jaw-dropping £3.54bn for the year to 26 February, on sales up 8.1 per cent to £67.6bn.

Its retailing services empire – exemplified by Tesco Bank delivering a 5.6 per cent gain in profits to £264m – also played a key role.

But Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "Tesco's international spread has again come to the rescue as its home market struggles to come to terms with the age of austerity."

Perhaps the biggest surprise was Mr Clarke's candid assessment of the shortcomings of Tesco's performance and commitment to engage with stakeholders more widely. He said: "There is nothing to hide for Tesco. We have to engage and my job is to look forward not back."

Mr Clarke also waxed lyrical about "sharpening" Tesco's performance, which marked a contrast with the more reserved and more cautious tone of Sir Terry.

He unveiled six "immediate team objectives" for the group, including keeping the UK strong and growing; second becoming outstanding internationally, not just successful; and being a multi-channel retailer wherever it trades.

Certainly Mr Clarke did not pull any punches in describing the performance of Tesco's UK business as "below par", saving his most fierce criticism for general merchandise categories, such as clothing and home, for being a "bit samey".

While trading profit grew by 3.8 per cent to £2.5bn over the year – accounting for 68 per cent of the £3.68bn total, Tesco had obviously had higher expectations. Mr Clarke said: "It [UK] has not been leading and it has not been a great year by our standards. Like-for-like [sales] was below the market in the second half and profit growth was below our plan."

In fact, Tesco's underlying sales, excluding petrol and VAT, actually fell by 0.2 per cent over the year, which is behind that of its two listed rivals Sainsbury's and Morrisons.

However, the grocer's UK sales alone came in at £44.57bn, which is more than double the £21.42bn posted by Sainsbury's on these shores in 2009/10. In fact Tesco opened a "record" amount of space of 2.5 million sq ft in the UK last year. But as with its big grocery rivals, Tesco, which has 2,715 stores in the UK, has also been hit by a slowdown in consumer spending this year in the wake of record petrol prices, higher taxes and fears over, and actual, job cuts, particularly in the public sector.

Laurie McIlwee, Finance Director, said all the pressures on UK households amounted to up to £20 less to spend a week, equal to a 7 per cent rise in the basic rate of tax.

While Mr Clarke said the non-food market had "softened", the grocer created its own difficulties on clothing and homewares. "Our clothing assortment was not quite right. It did not sell as well as we hoped." He was confident about improving its clothing offer, but admitted its homewares "will take a bit longer to fix". In the UK, general merchandise, clothing and electricals sales only grew by 0.2 per cent to £5.3bn.

However, in the US, Tesco faces far more substantial challenges in turning around the performance of its Fresh & Easy convenience stores in California, Nevada and Arizona.

The US chain's losses widened to £186m in 2010/11, compared with £165m the previous year, despite forecasts that its losses had "plateaued" last year. At the interims in October, Sir Terry said Fresh & Easy would break even before the end of 2012/13.

Mr Clarke said he was "confident" of hitting the profit target, which he described as a "realistic objective". But he said it needed "more customers" and was seeking to improve its performance with operational changes, such as opening one hour earlier and selling fresh bread, pastries and coffee.

However, he was more explicit on Japan, where it has struggled to make its mark since entering market in 2003. Mr Clarke said Tesco will not open any more stores or commit more capital expenditure in Japan "unless it sees a way to win". Tesco's food supply chain has also been hit by the catastrophic tsunami in March.

But the company blamed the Chinese government's fiscal measures and spiralling inflation for failing to break even in second half in that country. It also scaled back the timeframe for acquiring shopping malls in China to 50 in five years, instead of 80.

Overall, however, there are few, if any, retailers in the world that would not have given their right arm for Tesco's bulging underlying profits of £3.81bn. In an ominous sign for its UK and global rivals, Mr Clarke seems fired up for the battle ahead. He promised, "more focus, more energy and more determination – that is the way I like to work".

Tesco to take on Amazon

Tesco is to take on Amazon with an online marketplace that will allow third-parties to trade goods on its website later this year. The supermarket giant did not reveal a name for the Amazon-style website that will offer a huge variety of non-food products. But Philip Clarke, the new chief executive, said it would "possibly" sell clothing on the site and it is certainly looking beyond the UK eventually. He said: "We are building a platform that can go to any market and not just the UK."

Tesco is increasingly taking its massive online food and general merchandise overseas. For example, it will launch dotcom grocery in Prague in the next few months and in Warsaw in 2012. The supermarket giant is also planning a "sizeable online non-food launch" in South Korea over the coming months.

Over the year to 26 February, Tesco's online businesses grew sales "strongly" by 15 per cent, including its internet – grocery operations in South Korea and Ireland. In the UK, the supermarket's online grocery operation posted double-digit growth and an impressive 30 per cent leap in Tesco Direct, its combined catalogue and non-food operation. Mr Clarke vowed to make it a "multi-channel retailer wherever we trade".