Jeremy Warner: Despite recession, Tesco juggernaut just keeps on rolling

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The Independent Online

Outlook There is still no sign of the wheels coming off the Tesco trolley. To the contrary, there's every indication in yesterday's full-year profits that the recession and accompanying banking crisis, far from marking the beginning of the end for the Tesco growth story, is providing new opportunities that will further strengthen its position in the years ahead.

A prime example of this is Tesco Personal Finance, which the company is planning to develop into a full- service retail bank. Tesco is benefiting from the implosion which has engulfed the rest of the UK banking sector in three important respects. The crisis has meant that Tesco has had its pick of top retail banking talent at affordable salaries, enabling it to build one of the best teams in the business.

Tesco has also benefited from a return to a more traditional model of banking where retail is not cross-subsidised from corporate and wholesale activities. This has already significantly widened the margin on the plain vanilla banking that Tesco offers, enabling it for the first time to make good profits out of its value proposition.

But most important of all, trust in traditional high-street banking has all but disappeared with the realisation that these once venerable names hadn't a clue what they were doing. A trusted brand such as Tesco ought to be a major beneficiary of this process.

Yet in the core retail business too, Tesco seems to be defending its turf better than many anticipated. Over the last six months, Tesco seems to have reversed the mistakes it made in the early part of the downturn, when a significant amount of market share was lost to discounting rivals. Tesco's like-for-like sales growth still seems to be lower than its main rivals – Asda, Morrison and Sainsbury – but the picture has become confused since the introduction of Tesco's "discount brands". These have significantly changed the sales mix of the average Tesco shop.

It may be that, in terms of volume, Tesco is again outperforming rivals. The profit margin has also been left undamaged by the price promotions, which again makes Tesco seem more robust than competitors, some of which seem still to be sacrificing margin for volume. In any case, having achieved some success in winning back lost footfall, Tesco is planning substantial investment in its Clubcard in an effort to rebuild customer loyalty.

But don't be misled. It's not all Tesco genius. As it happens, the downturn in the consumer economy was never quite as bad as it seemed. Falling interest rates, petrol prices and energy bills have put quite a bit of money back in people's pockets since the big inflationary squeeze of nine months ago. All that policy action has had its effect. This is reflected in the numbers now being announced by retailers. Few of them have proved quite as dire as the gloomsters predicted.

Interestingly, Tesco found that as petrol prices rose, its stores were less used by traditionally loyal customers who lived some distance away. With falling fuel prices, that trend has gone into reverse. The customers are coming back again. Many people, it seems, have a single budget for their weekly shop which includes the cost of fuel.

It's not all sweetness and light. Tesco has maintained its growth – sales up 15 per cent, underlying profits up 10 per cent for last year – largely because of its international expansion. In the round, this has been well executed and successful. Not so in the United States, historically a graveyard for many a British retailer.

Tesco has been unlucky with its timing and geography. The targeted states of California, Nevada and Arizona have been some of the worst hit in all of America by the recession. As a consequence, the planned rollout has stalled, leaving Tesco with too small a network of stores to justify the distribution, warehousing and other supply chain management costs. Sir Terry Leahy, Tesco's chief executive, insists that the concept will eventually work. Others are not so sure.

Could America yet prove Sir Terry's undoing? The press used to be alive with such predictions, yet funnily enough, now that we know the venture is in trouble, you don't see so many of them. In the scale of corporate and banking disaster stories of the past couple of years, this slight misjudgement barely registers. Overall, Tesco is still growing strongly, and the dividend is up. There are not many companies you can say that about.

In tough times, people like their companies big, trusted, profitable and, yes, even dominant if they can offer employment and value for money. Much of the "Tesco bashing" of two years ago seems to have disappeared, along with other boom-time luxuries. If it works, don't knock it.

After 12 years of growth, doesn't Sir Terry ever think his luck is about to run out? Companies have a natural life-cycle of growth, maturity and decline. Shouldn't he be getting out now while his star is still high? Sir Terry is having none of it. Such are the opportunities in international and non-foods that he still believes Tesco to be in its growth phase. Who's to disagree?

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