Jeremy Warner's Outlook: The Tesco juggernaut may skid one day but for now the finely tuned machine rolls on

Shire domicile switch lacks credibility; Brown issues platitudes on crisis
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The Independent Online

Come rain or shine, the Tesco juggernaut just keeps rolling on. Those looking for signs of a road crash to come in yesterday's annual results will have been sadly disappointed. On virtually every level, the outcome was outstanding. There's virtually no sign of the slowdown said to be afflicting the wider economy, while international expansion seems to be progressing with barely credible precision and lack of mishap.

There were some bold statements too from Sir Terry Leahy, the chief executive. At one point in yesterday's presentation, he said that the group's international strategy had made growth prospects at Tesco better than they have ever been at any time in the past.

As for Fresh & Easy, the US venture which some in the press and the City have already written off as a disaster, in fact its performance so far had been "much better" than Sir Terry had dared hope for, so much so that after stalling the rollout, Tesco now seems to be planning to accelerate it again with a further 150 stores this year.

Overall US sales are ahead of budget, and in some stores are already above the US food retailing average of $20 per square foot a week. According to Sir Terry, independent research has meanwhile decreed that US consumers just love the new concept. Meanwhile, back here in the UK, like-for-like sales were up 3.9 per cent, and although this had slowed to 3 per cent in the last quarter, the growth was strengthening again into the start of the new year.

Overseas profits, up powerfully last year, are now bigger than the whole of Tesco was a decade ago when it embarked on its overseas expansion. According to Sir Terry, all the international businesses have the potential to be two to three times as big as they are today.

It all sounds almost too good to be true. Yet Tesco has confounded the sceptics for so long that pretty soon we may have to learn to believe these glowing appraisals of the future.

And for those who think that even the mighty Tesco must eventually succumb to the downturn, there are plenty of reasons for believing it may remain largely immune. Even in a recession, people have to eat, while there is some evidence to suggest that as consumers cut back in the round, supermarkets can be major beneficiaries as spending swaps from eating out to eating in, and in non-foods to the cheaper forms of produce found on supermarket shelves.

Yet the bigger reason for thinking Tesco will remain resilient is its overseas expansion, taking the company into growth markets relatively unaffected by the economic malaise of developed economies. The strategy carries substantial risk, yet so far the execution has been close to flawless. Eventually something within Tesco will break and the juggernaut will skid. Yet for the time being, it remains hard to see where the fault lines in this finely tuned machine might lie.

Shire domicile switch lacks credibility

Lots of UK business leaders have threatened to shift domicile in protest at Britain's supposedly uncompetitive corporate tax rates. Very few of them have actually done it, so for Shire, Britain's third largest pharmaceuticals group and a leading member of the FTSE 100, to go ahead and press the button is quite something.

Matthew Emmens, the chief executive, is a US national, 74 per cent of his sales are in North America, and he's been talking openly for some time about the possibility of locating the company somewhere else.

Yet his explanation, now that his board has decided to go ahead, is woefully inadequate. From the outside, it is impossible to see why the company is doing it at all. Shire paid just £8.8m of UK taxes last year, of which less than half was corporation tax. The legal fees of this restructuring alone will more than eat up what Shire has been paying the Exchequer.

For what it is worth, the following, drawn from yesterday's press release, is the closest Shire gets to justifying the move. "Shire has concluded that its business and its shareholders would be better served by having an international holding company with a group structure that is designed to help protect the group's taxation position, and better facilitate the group's financial management".

Is that it? Mr Emmens is going to have to do a bit better than that.

Critics of the Government will seize on Shire's move as evidence of Labour's increasingly heavy handed tax treatment of business, yet Shire cannot expect its predominantly UK shareholder base just meekly to accept its assertions without further explanation or cost benefit analysis.

If the move were to the US, which accounts for the bulk of the company's operations and sales, it might be understandable, but the move will be to Jersey, and the company will be domiciled for tax purposes in Ireland, where Shire employs just 55 people. Perhaps it is all about avoiding tax in the US. If so, I don't rate Shire's chances with the IRS.

Shire says that it is not trying to make a political statement by relocating. To the contrary, this is a clinically driven decision taken on entirely financial grounds. The political point may not be intended, but it will be drawn none the less. There will be plenty of other unintended consequences too. Some UK funds, with strict rules governing where their investments are domiciled, will have to sell out. Reputational damage is also possible, particularly within the National Health Service, the main UK customer.

Shire's decision will act as a powerful warning shot across the Government's bows over the taxation of business. Already reeling from the ineptly mishandled reform of capital gains and non-dom taxes, the Treasury needed this like a hole in the head.

Like large numbers of non-doms, Shire is voting with its feet. Other companies have gone before, most notably Experian, but that was part of a wider corporate demerger and restructuring. A trickle can soon turn into a flood, and if one major UK company successfully manages to relocate for tax purposes, others may soon follow.

All the same, as such a small UK taxpayer anyway, it is hard to understand why Shire is doing it. For the time being, the company offers no convincing explanation. The Government has been taking extreme risks with the UK's tax competitiveness, yet standards of governance, oversight and accountability remain generally better here than elsewhere. There are also ethical issues around locating major enterprises in offshore tax havens.

This is particularly the case for those that rely on the goodwill of major public health authorities for their profits.

Unless Shire can produce a compelling case for it, shareholders should vote against.

Brown issues platitudes on crisis

Gordon Brown offered bankers nothing but platitudes at yesterday's Downing Street meeting. He may be right that the UK economy is fundamentally sounder and therefore more resilient to the travails of financial markets than almost anywhere else, but I wouldn't like to bet on it.

Certainly the authorities in the US, and to some extent the eurozone too, have shown a much greater willingness than the UK to engage with bankers in an attempt to get credit markets going again.

In Britain, attitudes have been characterised by an almost pur-itanical delight in the mess the City now finds itself in, together with a widespread desire to see bankers punished for alleged misdemeanours.

After the excesses of recent years, the schadenfreude is understandable, yet it is also not very helpful if the bankers drag the entire economy down with them. Perhaps we are beyond the point of solutions, but there does at least now seem to be a dialogue.

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