Jeremy Warner's Outlook: As the UK market matures, can Sir Terry Leahy's Tesco resist the lure of the West?

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The Independent Online

When Sir Terry Leahy boasted that one in every eight pounds of British retail spending went through a Tesco till, he must have thought it just good PR - a mark of the outstanding retail success story Tesco had become. Instead, all it did was to focus attention on just what a dominant high street force Tesco had become. Competitors and some suppliers have been demanding that Tesco be cut back to size ever since.

Sir Terry will have drawn comfort from recent remarks by John Fingleton, chief executive of the Office of Fair Trading, that competition regulation is there to protect competition, not competitors, yet the clamour for action is growing and it may be unstoppable.

As it happens, Tesco's UK growth is beginning to slow in any case. Life-for-like UK sales growth (excluding petrol) for the latest quarter of 5.5 per cent is the sort of performance most other retailers can only dream of, but by Sir Terry's standards, it is almost pedestrian. For Tesco, this is the slowest rate of growth in two years.

For a long time now Tesco has had it all its own way. Both Sainsbury's and Safeway have been poor competitors, and even the Wal-Mart owned Asda has lost its way in recent years. That's now changing. Sainsbury's is coming back, Wal-Mart is determined to get back on the front foot at Asda, and even Safeway, newly absorbed by Wm Morrison Supermarkets, is rising slowly from the grave with prices which are once more broadly competitive with Tesco.

There's still plenty of growth left for Tesco in non foods and services, where few could possible see its intervention as anything other than positive. Yet one way or another, whether because of regulatory clampdown or because all growth spurts eventually just die of old age, the best may already be behind the Tesco behemoth.

In Britain, that is. As far as the rest of the world is concerned, the potential is still vast. So far, Tesco, has largely confined its overseas expansion to emerging markets. The exception has been Japan, where Sir Terry has seen an opportunity to enter the market by helping recapitalise some essentially bust food retailing companies. It's been only a toe in the market, but an instructive and productive one nevertheless. Might he be about to do the same thing in the US, graveyard of many a British retailer before him?

That's the buzz, though the company sticks to the line that for the time being there are no such intentions. Emerging markets will one day be a big money spinner for Tesco, but they are going to take a long time to reach Western standards of wealth and consumption. In the meantime, Tesco may need to buttress its growth with other sources of income. To try to take on Wal-Mart on its own home turf would be a foolish endeavour but, as in Japan, there are plenty of niche opportunities in US retailing, and, as in Britain, a crying need for decent alternatives to the dominant incumbent.

Sugar deal; a good result for Tate & Lyle

All that lobbying in Brussels has paid off handsomely for Tate & Lyle, Europe's largest refiner of sugar cane. Instead of the originally proposed 39 per cent reduction in the European sugar reference price, there's instead to be a cut of 36 per cent. The time allowed for phasing in the new regime has also been doubled to four years while the company will enjoy the lion's share of newly announced transition aid designed to help the plight of disadvantaged sugar cane refiners.

Yet despite the success of the lobbyists, it is the company's own remedial action which should be most applauded. The company has long been planning for the worst possible outcome, and even if proposed changes to the EU sugar regime had not been eased, Iain Ferguson, the chief executive, was confident of being able to offset the adverse effect on earnings with product replacement and cost cutting initiatives.

The outstanding success on this front is the company's artificial sweetener, Splenda, which is taking the American market by storm. Revenue from products other than sugar is already more than half the total. Mix the pricing concessions, the remedial action and the new product initiatives together, and Tate & Lyle reckons that the total effect on operating results up until 2009 is even mildly positive. No wonder the shares rose 6 per cent yesterday. Even a few years back, few would have predicted such a benign outcome.

Langbar's lesson in the obvious

Now there's a thing. Langbar, an AIM-listed cash shell which was meant to have £365m on deposit in a Brazilian bank account, turns out to have been a massive fraud all along.

This was always obvious to anyone familiar with the wild west frontier of capitalism that is the Alternative Investment Market, yet as recently as last August, the company managed to raise £4.3m from investors for the purpose of extracting the money out of Brazil.

The chief executive, Stuart Pearson, has also repeatedly expressed confidence both in the existence of the money and the company's title to it. It was left to a comically worded press release from the company yesterday finally to disillusion him. Following an investigation by Kroll Associations, the risk consulting firm, the company has been unable to "establish the existence of, nor verify the company's entitlement to, any of the relevant assets at any time in the company's history".

The guiding principle of AIM is caveat emptor, so nobody should feel too sorry for those facing steep losses over the affair. They knew the risks, they gambled, and they lost. That names as big as Merrill Lynch and Gartmore, both substantial shareholders in Langbar, have also been made to look complete mugs, is already a subject of some mirth in the City.

Even so, the episode raises new questions about AIM, where there has been a growing number of frauds. The success of AIM has been built around an almost total relaxation of tried and trusted regulatory standards, allowing companies with little track record, or as in this case, little even in the way of an underlying business, to come to market with minimum disclosure and corporate governance obligations.

In itself, there is nothing wrong with this. If there is investor demand for a market with no shareholder protections, then so be it. Full marks to AIM and its sponsors at the London Stock Exchange for filling the gap. Yet even AIM doesn't pretend to operate solely on the basis of buyer beware. Investors are also entitled to rely on the the good name of the "nominated adviser" (nomad), whose job it is to vouch that everything is as it is supposed to be. In the Langbar case, the nomad was first Nabarro Wells and then Arden Partners, neither of which can be described as exactly top drawer City names, but presumably still have some sort of reputation left to defend.

The company's founder, Mariusz Rybak, used apparently to be known as the Baltic Barracuda, which you would have thought would be warning enough. Yet it wasn't until he started selling shares at 50p that anyone thought seriously to challenge the company's claimed net asset value of 220p a share.

AIM lays claim to some great little companies, but it is mostly crud. For those tempted by its free wheeling ways, just remember; make sure you are wearing your flak jacket.

Pickering's pensions postscript

Alan Pickering accuses the Government of using the same dirty tricks to undermine the Turner report as were applied against him three years ago when he produced an earlier tome for the Department for Work and Pensions. No doubt he's right, but my recollection is that whatever dirty tricks were applied, they were as nothing compared with his own gaffe in describing widows' pensions as "bells and whistles" which could easily be dispensed with as a way of making occupational pensions more affordable. Even the most cynical of politicians could hardly be blamed for ridiculing that one.

j.warner@independent.co.uk

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