Tesco slashes spending on new stores: Retailer faces up to harsh climate

TESCO, Britain's second-largest supermarket group, yesterday faced up to the harsher retailing climate when it announced that it was cutting back its store-opening programmes and writing off its stores to reflect their useful life.

The group intends to slash the amount it spends on new store openings by about 50 per cent, to between pounds 450m and pounds 500m, over the next three years.

Three years ago, when the group launched a pounds 572m rights issue, it was forecasting that its capital spending would climb to more than pounds 1bn.

The cuts will reduce the number of new stores opened to about 20, compared with the 28 planned for this year. But their average size will drop sharply from about 31,000 sq ft in the current year to about 22,500 sq ft, as Tesco shifts its focus from large out-of-town stores to smaller sites in market towns and city centres.

The group already has nine Metro stores in centres like Liverpool, Bristol and Covent Garden in London and aims to open up to six more a year. A further 10 or so of the openings will be in market towns, like Colchester.

David Reid, finance director, said the reduction in the superstore programme reflected both increasing competition and the difficulty of getting planning permission for large out-of-town stores.

It will also help the group to finance dividend payments to shareholders. The group said yesterday it was committed to a 'progressive' policy of increasing payments by more than the rise in earnings.

The news sent its shares up 15p to 251.5p and the enthusiasm extended to other shares in the sector, with J Sainsbury gaining 11p to 477p and Argyll, owner of Safeway, adding 8p to 305p.

The group also announced that it would depreciate the cost of its land and buildings, over 25 years and 40 years respectively, to reflect the expected life of the stores and the likely residual value of the sites. In the year to February, that will mean a pounds 68m charge against the group's profits.

A further pounds 85m will be written off the cost of land which, because of the reduction in its opening programme, it no longer intends to develop.

The changes were announced as the group said that its sales in the 20 weeks to 1 January were 11 per cent ahead of last year, with volume growth excluding new openings accounting for 2.5 per cent of the increase.

That means that the group's profits will be 'slightly higher' than the pounds 580.9m achieved last year. Analysts are forecasting profits of between pounds 590m and pounds 600m.

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