Outlook: Tesco's emigration

JUST IN CASE the City didn't get the message at Tesco's half year results last week, the supermarket group was banging the drum again yesterday at an investor relations seminar dedicated to its latest hot subject: overseas expansion. So many British companies have lost their shirts indulging themselves in this favourite of executive pursuits that is it worth examining these plans in some detail.

Within three years, Tesco expects to be making about pounds 150m annually from the first 130 of its planned overseas megastores in markets like Poland, Hungary, Thailand and Taiwan. According to some City projections, overseas trading profits might be as high as pounds 450m two years thereafter, or about a quarter of the group total. The logic of this strategy is hard to fault. Tesco may be the dominant player in the UK, but it is nonetheless vulnerable for that to the present pressures on the industry than its smaller rivals. Constrained by strict planning laws, the domestic market is mature as mature can be, and a new shark has entered the waters in the shape of Wal-Mart.

By contrast, the market in Central Europe is both fragmented and undeveloped, while all these economies will benefit enormously from eventual entry into Euroland. As for Asia, the cost of entry is high but the rewards potentially higher still. So assuming Wal-Mart does not completely destroy UK margins, all would seem set fair for another five years of spectacular growth. That's the bull case for Tesco, anyway. As ever, you have to be an optimist wholly to buy into it. Tesco's management is generally regarded as a class act, but then so was that of Marks & Spencer just before the fall. Perhaps ominously, the first sign of trouble at M & S was when its aggressive overseas expansion strategy began to come unstuck. The list of high street retailers that have caught a bad case of flu overseas starts with Dixons and Laura Ashley, extends through Body Shop and runs on as far as the eye can see.

Even so, Tesco seems to have as credible a strategy as any. Certainly it is a better approach than Sainsbury's, whose decision to expand in North America, another mature market, looks ever more perplexing. If all goes according to plan, Tesco's will emerge at the other end as one of retailing's global elite with a stock market rating to match. But there's many a slip, and while one eye is focused on the long term potential of these underdeveloped markets, another will be firmly concentrated on the immediate game of growing consolidation in Europe's heartland