US failure costs Tesco £1 billion as store calls time on American venture

 

Tesco's bid to take on Wal-Mart in its own back yard was consigned to embarrassing and costly failure today, with the supermarket giant £1 billion poorer than before the launch of Fresh & Easy in 2007.

Tesco's California-based arm has yet to make a profit and with latest figures pointing to another dismal sales performance, chief executive Philip Clarke said the group was not afraid to make "big decisions" by calling time on a venture that would take too long to deliver value to shareholders.

His strategic review, which is expected to see Tesco's presence in the US come to an end in its current form, met approval in the City as Tesco's shares jumped more than 3 per cent.

Clive Black, retail analyst at Shore Capital Stockbrokers, said the review of the near 200-strong Fresh & Easy chain was "one of the most high profile and perhaps defining moments" in Mr Clarke's near two-year tenure as chief executive.

It is also the group's second withdrawal from an international market in less than a year, having announced in August it was pulling out of Japan after ploughing more than £250 million into the venture and spending eight years trying to crack the market.

The decisions mark a reversal of some of former boss Sir Terry Leahy's ambitious expansion strategy and have prompted questions over the group's handling of the more recent international launches.

Bad timing was partly to blame for the Fresh & Easy woes, with the chain arriving amid a housing market slump in California and just before the financial crisis struck.

But the team's strategy - under Sir Terry and US chief executive Tim Mason - also appeared to be flawed from the start.

Its decision to launch Fresh & Easy as a small store format meant it faced a lot of upfront costs, while its self-service checkout model led to the often-quoted gibe that it was "not very fresh and not very easy".

The group remodelled some stores and mothballed others, but the damage was done to its reputation in the early days.

Nick Bubb, an independent retail analyst, added that it was "pretty arrogant" to believe there was a gap for it in the world's most competitive grocery market.

Even renowned US investor Warren Buffett said he believed Tesco had been "foolhardy" to enter the US grocery sector.

If it had worked, Tesco could have made a lot of money, but it was a £1 billion gamble that did not pay off.

Mr Clarke said: "For us, the lessons are clear - in the future we'll make sure we do the things we have done in other markets."

Its expansion into emerging markets such as Asia has been hugely successful, thanks to a strategy to roll out hypermarkets with a focus on general merchandise.

"They make a ton of money in markets such as South Korea - they should just focus on the Far East," said Mr Bubb.

The review of Fresh & Easy has seen Mr Mason - who is also the company's deputy chief executive - quit Tesco after 30 years with the firm, with Mr Clarke saying only that it "felt like the right time for Tim to leave".

For its 5,000 staff in America, the decision leaves them facing months of uncertainty.

Pat O'Neill, vice president of the United Food and Commercial Workers union in the US, said: "Thousands of Tesco workers at Fresh & Easy stores in the US now face their holiday season filled with uncertainty and fear whether their jobs and their stores will be there in the new year.

"These job losses could have been avoided if Tesco had chosen to engage with community stakeholders and its customers to address the many underlying problems and warning signs of the troubled Fresh & Easy model."

PA

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