Jeremy Warner's Outlook: Tesco's Sir Terry forced to look overseas as the planning backlash in Britain intensifies

M&S: reasons to be cheerful; PSA comes up with the goodies at P&O; BA cannot follow Rentokil on pensions
Click to follow
The Independent Online

A harbinger of things to come for the overarching Tesco, or just part of the usual planning system lottery? Anti-Tesco lobbyists were yesterday reading much significance into Barnet Council's decision to deny planning permission for a new Tesco Express on the site of an old carpet warehouse in Finchley, London, this on the grounds that it "would have a significantly greater harmful impact on the vitality and viability of nearby town centres than the existing lawful use".

The New Economics Foundation, a think-tank which has been campaigning against the growing power of the supermarkets, hailed it as a landmark decision which marked a turning of the tide against the mighty Tesco. Not so, says Tesco, which points to a number of similar refusals over the past two years. Tesco makes lots of planning applications, and occasionally they fail.

Tesco's Sir Terry Leahy would be unwise to be so sanguine, and I'm quite sure that beneath the measured, calm exterior, he's not. A backlash is already under way among planning authorities and activists in local communities. Ambitious plans to double the group's convenience stores presence over the next 10 years must be open to question.

Tesco still has plenty of scope for UK growth in non foods and services, but it is no accident that Sir Terry now devotes so much of his time to overseas ambitions. Tesco may already be close to the high water mark of its UK influence. Sir Terry must look beyond these shores to sustain the heady pace of growth in sales he's achieved thus far.

M&S: reasons to be cheerful

Stuart Rose seemed to be attempting to outdo the notoriously gloomy Simon Wolfson, the chief executive of Next, in giving such a downbeat assessment of prospects for Marks & Spencer yesterday.

Market conditions remain challenged, he said on announcing a decent 2.9 per cent rise in like-for-like Christmas sales. Rents and utility costs are rising sharply, and he's not yet confident enough to declare the turnaround in M&S's fortunes permanent. After the sharp run up in the share price of recent months, he is perhaps right to want to manage expectations. It is always better to over achieve than to over promise.

None the less, methinks he doth protest too much. Most of the sales gain was in foods - up 5.1 per cent in the 13 weeks to 31 December - which has been an easier part of the business to fix than clothing and was heavily promoted over the Christmas period. Yet even general merchandise achieved a respectable 0.8 per cent rise in like-for-like sales. This is a much better performance than Next and probably a little bit better than the sector as a whole.

More encouraging still is the change in the sales mix, with full price sales of general merchandise up 5.3 per cent and about 35 per cent less stock going into post-Christmas clearance sales than this time last year.

Further progress lies as much in the lap of the gods, otherwise known as the nine members of the Bank of England's Monetary Policy Committee, as with Mr Rose. The best of the improvement in margins may already be over, with rent and utility costs rising and perhaps little more to be gained by way of concessions from suppliers. From here on in, Mr Rose must rely increasingly on top-line growth to deliver further meaningful improvements in profits.

All the same, in my view he's being too glum. By the end of this year, some 30 per cent of the group's store portfolio will be in the new format, which assuming the consumer doesn't entirely go on strike, should in itself deliver reasonable growth in like-for-like sales.

When you look at where the company has come from since the retail entrepreneur Philip Green made his £4-a-share offer, the progress has been little short of miraculous. At the time, Paul Myners, the chairman, said he was determined that Mr Green should not be allowed to "steal" M&S. He succeeded in seeing off Mr Green, and now he's succeeded in demonstrating that the company would indeed have been a steal at the suggested price.

The lesson is to beware of private equity when it comes bearing gifts. It's not always the case that the company is worth more, but most of the time it is. The thing Mr Rose must be most careful of now is complacency. Luc Vandevelde, one of his predecessors, made the mistake of declaring the turnaround complete after only a couple of quarters of decent sales growth. They proved just another false dawn. There's much work left to do.

PSA comes up with the goodies at P&O

Having talked the Takeover Panel out of delivering a put up or shut up ultimatum, the Port of Singapore Authority (PSA) has decided to put up of its own accord. Last night's 470p-a-share offer for Peninsular & Oriental Steam Navigation Company is not quite the real thing, as it is subject to a number of conditions, yet it is hard to see why these conditions shouldn't be met.

There are no competition issues to speak of, it is hard to see why the due diligence should fail, and the P&O board has already indicated it is willing to withdraw its recommendation for a rival offer from DP World by adjourning the shareholders' meeting to vote on the proposal. Since PSA is prepared to offer exactly the same pension fund top-ups as DP World, it is equally hard to see why the pensions issue should be a deal breaker either.

The P&O board is made to look a little foolish in recommending the lower bid from DP World, and agreeing a 1 per cent break fee, when there was plainly more to be had. But who's complaining? In the end it's going to come down to which bidder has the deeper pockets. For shareholders in the last remaining bit of Lord Sterling's legacy not yet to be taken over, it's a pretty good position to be in. What a ride they've had since the break-up of this once mighty corporate empire began.

BA cannot follow Rentokil on pensions

When Rentokil Initial closed its final-salary scheme to existing members, the assumption was that other FTSE 100 companies with unaffordable pension promises would quickly follow suit. That may not be the case, if only because for some the cost of closure would be greater than living with the deficit.

British Airways, which has the biggest deficit in the Footsie relative to market capitalisation, is a case in point. On an FRS 17 basis, the deficit stands at £1.4bn. But if BA were to close the scheme entirely and crystallise the loss, it would cost about £3bn on a fully funded basis.

This would be a huge financial burden for a company like BA which already has a big investment programme and will in the next few years need to spend anything up to £10bn on new long-haul aircraft. Abandoning the final-salary scheme would also give BA's militant trades unions another reason for taking industrial action. Two-thirds of the company's 48,000 staff are in the final-salary scheme, whereas Rentokil's scheme only has 3,000 active members.

Wisely, BA's new chief executive has therefore rejected this route, though it may still be appropriate for others, Compass being a case in point. Yet he has to do something about the shortfall. Until he has plugged the gap, BA cannot return to the dividend list, nor make any corporate moves or investments of any size.

It also has to survive against competition from low-cost rivals which do not have the albatross of a pensions liability around their necks. Full-service US operators have, meanwhile, been able through Chapter 11 bankruptcy procedures to dump their pension liabilities on to the Government.

BA's pension deficit is shackling the rest of the business so it is easy to see why the chief executive Willie Walsh has made coming up with an answer his top priority. Which ever way he cuts it, the solution is bound to be painful.

j.warner@independent.co.uk

Comments