Jim Armitage: Tesco's much-needed prune isn't a cause for panic


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The Independent Online

By his dry standards, Sir Terry Leahy was dewy-eyed with hope and optimism back in 2006 when he declared war on the US grocery market. "This is a tremendously exciting move for Tesco which will add a new leg to our international expansion," he proclaimed.

"The US is the largest economy in the world, with strong forecast growth and a sophisticated retail market." Tesco had, he said, researched the American shopper for many years before taking the plunge.

Sadly for his replacement, Philip Clarke, the research was duff. The team not up to the job, the strategy fatally flawed.

Americans already had highly sophisticated grocery stores in the areas Fresh & Easy was trying to get a foothold – what did Tesco think Wal-Mart had been doing for the past 50 years? From the very start, Tesco's shops weren't big enough to get the economies of scale needed, or the ranges of products California shoppers demanded. Americans hated the complexities of the self-service checkout. In the land of unrivalled choice, unidentified items in the bagging area did not go down well. The joke became "Not very fresh and not very easy."

Tim Mason, a talented executive who inexplicably clasped the hospital pass of setting up the US operation, quit with a £1.7m payoff, his hopes of being the next chief executive sunk into the Atlantic.

A revamp was ordered, stores closed or reconfigured, but it was all too late.

It wasn't the only foreign adventure of Sir Terry's to leave Tesco with a nasty bug. Mr Clarke has also been left administering treatment – or should that be amputation? – to other Tesco extremities gone gangrenous. A year ago he announced Japan was for the chop after Tesco had spent a quarter of a billion pounds and eight years trying to crack that market. Now he is diluting the expense of China by merging operations with a local retail giant. That could signal an end to the Tesco brand there.

Increasingly, investors are left doubting Sir Terry's judgment. But, despite the troubles abroad, Tesco is still one of Britain's biggest corporate success stories, and he should take the credit.

Sure, Mr Clarke has work to do getting its overseas laggards to shape up or ship out. He does face difficulties fixing its sales growth in the UK and working out what to do with all those empty out-of-town megastores.

But, before you start believing the inevitable comments about how Tesco has lost its way and is facing defeat by Sainsbury's, pop these facts in your carrier bag: Tesco's non-UK stores still make more money than the whole of Sainsbury's. In Thailand alone it has more stores than there are Sainsbury's in Britain. Sainsbury's made a profit of £756m last year. Tesco made £2bn.

That's not to say Tesco isn't in need of dramatic change to get its growth trajectory back. This deal is part of that process. Mr Clarke is making tough, and mostly right, decisions.