Tesco backs non-food stores as profit soars

Grocer denies speculation that expansion of Homeplus put on hold

Tesco has reaffirmed its commitment to growing its Homeplus standalone non-food format ahead of it unveiling expected record annual profits of more than £3bn today.

Speculation has been mounting that Tesco had put on hold a further expansion of its Homeplus stores, which currently number 13, but yesterday the retail giant was forced to deny this was the case.

A Tesco spokesman said: "Our trial of Tesco Homeplus non-food stores is continuing with 13 stores now open," although he declined to comment on its pipeline of new store openings.

The commitment by the UK's largest grocer to Homeplus comes at a time when rival Asda has vowed to step up the expansion of its Asda Living non-food format, as part of its plan to leagfrog Tesco as the UK's biggest non-food retailer over the next five years.

City analysts expect Tesco, which has operations in 14 countries including the US, China and South Korea, to unveil pre-tax profits up by 8 per cent to a record of £3.38bn in the year to February 2010.

Tesco launched Homeplus at a store near Manchester in 2005, and the last stores it opened were in Nottingham and Edinburgh in November 2008. The shops sell a vast array of general merchandise, including bikes, homewares, clothing and computers, but not food.

The Tesco spokesman said: "Customers particularly like the convenience of being able to shop in the store as well as from Tesco Direct catalogues and collect their purchases from stock. This facility is available in six Homeplus stores and is likely to be introduced into more later this year."

However, Bryan Roberts, the global research director at Planet Retail, said: "Clearly, Homeplus has not lived up to expectations. If Tesco feels like something has legs they will go for it. I think it is inferior to Asda Living, mainly because Tesco lacks that killer brand in clothing. Tesco's Florence & Fred and Cherokee brands have done quite well but they cannot hold a candle to George [Asda's clothing brand]."

Last week, Andy Bond, who is stepping down as chief executive of Asda to become the grocer's part-time chairman, said that the Wal-Mart-owned supermarket plans to grow Asda Living from 25 stores to 150 over the next five years, although this is only half of a previous commitment to open 300 that he made in 2007.

Furthermore, eyebrows have been raised about whether Asda will be able to overtake Tesco in non-food without making a major acquisition of a general merchandise retailer.

Mr Roberts said: "They [Asda] are being overly optimistic if they think they can get to number one by opening 150 Asda Living and a following wind in e-commerce."

Speculation has recently linked Asda to a potential acquisition of Home Retail Group, the owner of the catalogue specialist Argos and DIY retail chain Homebase, but the grocer has declined to comment on the rumours.

Tesco is expected to say that its group full-year sales jumped by 8 per cent to £58.4bn, driven by strong performances overseas, such as in South Korea where it acquired the Homever chain in May 2008. However, City analysts will scrutinise any comments made by Sir Terry Leahy, Tesco's chief executive, about current UK trading and the outlook for consumer confidence. The UK's biggest grocers have seen their sales growth dented by falling food price inflation and consumers trimming their spend. This month analysts at JP Morgan Cazenove said: "We believe the start to 2010/11 has been tough with like-for-like sales slowing [at Tesco]."

For the 12 weeks to 21 March 2010, Tesco delivered sales growth of 4.1 per cent ahead of Asda's 2.7 per cent, but behind Sainsbury's 4.6 per cent and Morrisons' 7.8 per cent, according to Kantar Worldpanel. The firm said the sales growth at the UK's major grocers had fallen to a pre-recession low of 3.6 per cent. Tesco market share of 30.3 per cent dwarfs Asda's 17.1 per cent, Sainsbury's 16.3 per cent and Morrisons' 12.1 per cent.