Store shake-up and online effort in Tesco fightback

Grocery giant earmarks £1bn in bid to boost domestic performance after fall in profits

Tesco put a radical overhaul of it UK stores and dominating online shopping at the heart of a £1bn fightback to turn around its weak domestic performance yesterday.

Following the grocery giant's first fall in UK profits for decades, Tesco is also slashing the amount of big stores it opens this year, to focus on smaller shops in this country.

The retailer, which has operations in 14 countries, has had a rough ride recently, after its first profit warning in 20 years in January and its UK underlying sales falling behind Morrisons, Asda and Sainsbury's. Its shares, which started the year above 410p, fell another 2 per cent yesterday to close at 321.05p.

Philip Clarke, its chief executive since March 2011, vowed to invest more than £1bn in its UK operation this year to put the "heart and soul" back into Tesco. He said: "Tesco has launched a plan to get better in the UK."

His blueprint includes hiring 8,000 more staff – largely into the fresh food areas of its 750 bigger stores, increasing training, refurbishing a further 430 shops with a "warmer look and feel", and expanding its online operation. The grocer is investing £150m in online, including more than doubling the number of products it sells to 200,000 by Christmas.

In addition to extending its click-and collect service for non-food, Tesco's customers can now pick up groceries ordered online at car park collection points outside 45 of its stores. But Tesco is slashing the new space it opens in the UK by 38 per cent to 1.5 million square feet this year. This will see the group's capital expenditure cut from £3.8bn to £3.3bn.

While Tesco will open fewer superstores and out-of-town hypermarkets this year, it will still introduce more new UK shops in 2012-13, as it focuses on its smaller Metro and Express outlets.

Mr Clarke said: "Large stores with lots of non-food space will probably not be as necessary in 10 years' time because of the growth of the internet."

Tesco posted a 1 per cent fall in UK trading profit to £2.5bn over the year to 25 February, following a 0.9 per cent drop in underlying domestic sales.

Mr Clarke, who first started at Tesco in 1974, said he didn't know if its UK profits had ever fallen in 38 years.

Freddie George, an analyst at Seymour Pierce, said: "Tesco is still a strong business with an unassailable market-leading position in the UK that has temporarily come off the rails."

Strong international growth helped Tesco's pre-tax profits rise 1.6 per cent to a record £3.9bn, on total sales up by 7.4 per cent to a whopping £72bn.

Mr Clarke said: "In the last two decades, we have built a business outside of the UK that is bigger than Sainsbury's, Marks & Spencer and Morrisons."

The grocer grew its international profits by 17.7 per cent to £1.1bn, driven by robust growth in countries such as Malaysia and South Korea.

But Tesco has pushed back its "break even" target for its US business, Fresh & Easy, by a year to 2013-14. This follows Fresh & Easy racking up losses of £153m last year, although this was a 17.7 per cent reduction on 2010 -11.

Fresh & Easy plans to open fewer stores this year, as it seeks to prove the model is profitable before accelerating capital expenditure in America.

Mr Clarke said: "What we need to prove to shareholders is that we can get sustainable returns."

Excluding provisions for payment protection insurance, Tesco Bank grew profits by 29 per cent to £203m.

Tesco grew its full-year dividend by 2.1 per cent after a final payout of 10.13p.