Tesco Set To Call Time On Costly U.S. Adventure

by
Reuters
Tesco Plc is set to end its five-year attempt to crack the cut-throat U.S. grocery market and will focus instead on its struggling home business and faster-growing emerging markets.

Tesco

Tesco Plc is set to end its five-year attempt to crack the cut-throat U.S. grocery market and will focus instead on its struggling home business and faster-growing emerging markets.

The world's No. 3 retailer said it had launched a strategic review of its loss-making U.S. chain Fresh & Easy that could lead to the sale or closure of its 200 stores.

"We've now concluded that it is not going to deliver acceptable shareholder returns in an appropriate timeframe in its current form," Phil Clarke, chief executive of the British company, told reporters.

"It's likely but not certain that our presence in America will come to an end," said Clarke, speaking from Los Angeles.

Tesco shares were up 2.7 percent at 335.5 pence by 4:56 a.m. EDT.

Announcing the review alongside a third-quarter trading update that showed continued pressure in Tesco's home market, the group said it would report its findings when it publishes full-year results in April.

Tesco, which trails France's Carrefour and U.S. leader Wal-Mart by annual sales, said it had had a number of approaches from parties interested in acquiring either all or part of Fresh & Easy, or in partnering with the firm.

It added that Tim Mason, Fresh & Easy's CEO and deputy group CEO, is leaving Tesco after 30 years with the group.

Investment bank Greenhill has been appointed to assist with the review.

Having absorbed nearly 1 billion pounds ($1.6 billion) of capital since its 2007 launch when Tesco was run by Clarke's predecessor Terry Leahy, Fresh & Easy has failed to make a profit and Clarke has been under increasing pressure from investors and analysts to act.

The U.S. chain's third-quarter underlying sales growth eased to 1.8 percent from the second quarter's 6.9 percent - a performance deemed unacceptable by Tesco given the maturity curve the business should be riding.

"It will be costly to pull out, but the stock market has been urging Clarke to make up his mind and he will probably get credit for that," said independent retail analyst Nick Bubb.

Clarke said finding a solution to Fresh & Easy would allow the group to focus resources on other parts of the business.

"There are clear opportunities to put our people and our resources into other growing, more profitable, better returning businesses in markets where we are already strong and growing," he said.

Tesco posted a return to falling quarterly underlying sales in Britain, raising questions over whether Clarke's 1 billion pound recovery plan is struggling to take effect.

NOT GOOD ENOUGH

The company, which takes about one in every 10 pounds spent in British shops, said sales at UK stores open over a year, excluding fuel and VAT sales tax, were down 0.6 percent in the 13 weeks to November 24.

That compared with analysts' forecasts in a range of down 0.9 percent to up 0.2 percent and with an increase of 0.1 percent in the second quarter, which had been Tesco's first rise after 18 months of decline.

Tesco said like-for-like sales in food, the main focus of the recovery plan, grew 1.2 percent, ahead of the market overall, but conceded its non-food performance "was not good enough".

The group, which makes around two thirds of its sales and three quarters of its profit in Britain, stunned investors in January with its first profit warning in more than 20 years.

It is battling to regain momentum against a weak economic backdrop, with consumers fretting over job security and a squeeze on disposable incomes.

Tesco has suffered in the downturn more than its British supermarket rivals, in part because it sells more discretionary non-food goods where shoppers have been cutting back most.

In April Clarke launched the strategy to revive the company's fortunes in its key domestic market, investing in more staff, revamped food ranges, smartened stores that allocate more space to food and refined marketing and advertising.

Rivals Asda (part of Wal-Mart) and J Sainsbury Plc have both recently reported sales increases and the only major domestic rival to have reported a decline was No. 4 player Wm Morrison, albeit for different trading periods.

Tesco's problems are not confined to the UK and the United States.

In South Korea, its biggest overseas market, underlying sales fell 5.1 percent as legislation allowing local governments to impose shorter trading hours continued to hurt trading, while in eastern Europe underlying sales were down 3.6 percent, reflecting fallout from continued euro zone instability.

Tesco has a share price to earnings ratio of 9.7 times, below Wal-Mart at 14.7 times and well behind the 21 times price to earnings valuation boasted by Carrefour.

Tesco's total third-quarter sales rose 2.4 percent.