Jeremy Warner's Outlook: A high-risk roll of the dice, or a considered growth opportunity? Tesco goes stateside

Trade deficits - nothing to worry about; A cruel irony as ICI sells more assets
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The Independent Online

After nearly 20 years of thinking about it, Tesco is taking the plunge and going stateside. The US has so far always proved a graveyard for British retailing ambition, so what makes Sir Terry Leahy, Tesco's chief executive, so confident he can succeed where others have so singularly failed?

In the City yesterday, news of the move was received with horror and applause in equal measure. A bold move, some said, as in the Sir Humphrey sense of the expression. High risk, said others, pointing to the fact that the investment is destined to be both capital intensive and earnings dilutive for some years to come. These are shark-infested waters. Why risk bathing there at all?

Yet there are a number of reasons for optimism, and because this is Tesco, with its outstanding record of long- term value creation, investors are going to find it difficult to complain. There are quite enough cash cows in the UK stock market as it is. As a company bold and confident enough to invest in its future, Tesco makes a refreshing antidote.

Positive sign number one is that Tesco is not acquiring its way into the market. This is nearly always disastrous, not just because America, despite its superficial similarities, is such an alien business environment for Brits, but also because if the Americans are selling and no Americans are buying, there's invariably a very good reason for it.

Sir Terry gave up the search for suitable acquisitions long ago. The decent companies are either not for sale or too expensive. It's only the rubbish that the investment bankers hawk to unsuspecting British buyers. Instead, he plans to expand organically, as he has done successfully in Eastern Europe, and though £250m a year of investment is a lot even for a company of Tesco's size, he's hardly betting the ranch. If things go wrong, he should be able to exit at limited cost, as Tesco did in France. Such a failure might sink Sir Terry, but it won't sink the company.

By choosing California and a convenience store format, he also steers well clear of traditional Wal-Mart territory, both geographically and conceptually. It may sound odd given that this is the most mature, competitive and prosperous economy in the world, but large parts of America are almost totally bereft of decent food retailers. The space between Costco and eating out is wide open. With its busy, time poor, money rich population there's an obvious gap in the US market for a Waitrose style format.

At this stage of the game, Sir Terry is saying as little about his plans as possible for fear of alerting the competition. Yet this may well be what he's got in mind. You might think that in an economy as vibrant as the US, any gap in the market would already be filled. Not true. The US has given birth to some highly successful niche food retailers in recent years, from Wholefoods to Trader Jones. Gaps are opening up all the the time.

With signs of a growing consumer backlash against the likes of Wal-Mart, American consumers may even have outgrown their established retailers. There's every reason to believe Sir Terry can successfully exploit these trends.

Trade deficits; nothing to worry about

Those who think of Britain as just an adjunct of the United States, the fifty first state in fact, will draw some support for their view from figures yesterday which show that the country's trade deficit in goods as a proportion of GDP is almost as high as that of the US. At 5.4 per cent, the deficit is at its highest level since the dark days of 1974. Factoring in our surplus in services only improves things a bit. The deficit is still the highest since 1989.

The debt fuelled consumption that feeds this trade imbalance makes us much more like the US than Europe. Like the US, most of our growth in recent years has come from consumption, and as in the US, our appetite for it has been supported by a boom in house prices, which has made us feel wealthier and led to record levels of equity withdrawal. Whereas the US deficit is with China, Japan and the rest of Asia, ours is largely with Europe. For America's Wal-Mart, read made in China. In Britain, it's our demand for German cars and French champagne that keeps the Channel ports busy.

Once upon a time a deficit of this size would have been considered a matter of national shame, and very likely have triggered a financial crisis. Today nobody seems to pay any attention to it at all. Once apon a time, sterling would have taken a bath. Today, the pound mirrors the US dollar in miraculously remaining relatively strong.

The economic textbooks dictate that a trade deficit must eventually be corrected by a collapse in the currency, which makes imports more expensive and domestically produced goods more competitive. As in the US, the reason this hasn't happened is that the import of goods is paid for by an equally dramatic inflow of foreign capital. We might bemoan the way our British companies are being taken over by foreigners, but it sure does help pay the bills.

If things carry on like this, eventually there will be no family silver left to sell. For the time being Britain is a honeypot, an Ali Baba's bizarre for foreign investment. Again the same is true of the US, whose current account deficit is absorbing some 70 per cent of the exportable savings of the rest of the world. Britain cannot pretend to such hegemony, but we still account for a fair chunk of the rest.

Why are the Continentals so keen to export their savings to Britain? Is it our open markets, our commitment to free trade, our sound banking system, our light touch regulation, our increasingly entrepreneurial culture, or is it just that you can make a better return on your money in Britain than in Europe?

Well, perhaps a combination of all these things, but as Germany and others tut tut about the English speaking world's profligate ways, they would do well to keep in mind an important truth; if Britain and the US are to have less demand led growth, everyone else will have to have less export led growth. Perhaps they should get onto this deficit wheeze. It's obviously a good thing.

A cruel irony as ICI sells more assets

Who better to get rid of an unwanted bit of the speciality chemicals empire that ICI bought from Unilever than the man who sold it to the chumps in the first place? Step forward John McAdam, who was a big cheese at Unilever at the time of the deal and is now ICI's chief executive.

The £4.9bn transaction with Unilever will go down as one of the most ill-judged and misbegotten deals of all time. It was supposed to spring ICI from the trap of being a commodity chemicals producer exposed to the whims of the economic cycle and turn it into a sweet-smelling consumer products group.

In the event all it did was leave an albatross of debt around the company's neck. Two chief executives have since paid with their jobs and, although the debt pile has since been made more manageable, ICI has discovered that speciality chemicals is not as immune to the cycle as it thought.

Admittedly, the former Unilever business which is now being sold off, Uniqema, was never exactly at the sexy end of the chemicals business, if such a thing exists. It makes fatty acids which go into detergents and leave behind a by-product of glycerine which is used in mouth wash.

The £200m-£400m which the sale should raise, depending on how much of an auction Mr McAdam can generate, will barely cover the book value of Uniqema. He promises to re-invest the proceeds into the bits of ICI which are ripe for "aggressive growth" - flavours, fragrances and the Asian paints market.

Despite Mr McAdam's best endeavours, investors still don't quite get ICI. He's steadied the ship since his arrival two years ago, but he's a country mile to go before he returns the business to the heights it once commanded as a bell wether of the British economy.

j.warner@independent.co.uk

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