Blog: Tesco faces questions over UK and US

Michelle Russell | 11 April 2012

Tesco is facing increasing pressure from its shareholders to pull out of the US and focus on rejuvenating its flagging UK business.

Reports of investor discontent come ahead of the retailer's annual results next week when the market will want to hear more about chief executive Philip Clarke's plans to revitalise its UK operations.

However, Clarke is likely to face questions over its US chain Fresh & Easy and over its banking operations, where progress has been slower than hoped.

Tesco's third-largest shareholder, Legal & General Investment Management, has publicly voiced concerns over the retailer's strategy.

The investor told The Sunday Times: "Can it be everything to everyone, or should it focus on its gem, the British grocery business? Of course, this is likely to raise questions about other areas of the business, such as America and the bank."

It is estimated that Fresh & Easy has racked up losses in the region of GBP700m (US$1.1bn) since it launched in the US in 2007. The banking arm has yet to deliver promised current accounts.

An anonymous institutional investor told The Guardian that Fresh & Easy was a "disaster" and, once the level of losses had become obvious, Tesco "should have pulled back faster".

In the UK, however, the situation is similarly dismal. Tesco has been on the back foot since January when it delivered another quarter of falling like-for-like sales and issued a surprise profit warning.

The retail giant is stepping up the overhaul of its UK business and deliver what it had initially tasked as a three-year programme of investments in just 12 months. Yet, investors are questioning how viable this really is.

Legal & General believes the retailer will need to invest as much as GBP1bn to turn around its flagging UK business, Bloomberg reported yesterday.

In addition to the "significant" sum required, Legal & General fund manager Richard Black told the publication the supermarket chain needs to provide "clarity on where the money is being spent, the returns expected and how the grocer measures its effectiveness".

As for the US, at the firm's annual results last April, Clarke said it was "essential" that losses from Fresh & Easy come down over the next year after the division's bottom line worsened over the prior 12 months. The unit's trading losses widened by 9.7% to GBP186m in the year to 26 February 2011, despite sales growing 38.1%. Tesco attributed the widening losses to the integration of the two fresh food suppliers it acquired in 2010 - 2 Sisters and Wild Rocket Foods.

The unit, however, showed an improvement by October last year at Tesco's half-year results, with losses narrowing by 23.2%.

Clarke has insisted he is confident the business will break-even towards the end of 2013. Whether this is achievable or not may become clearer at the release of its annual results and strategic review on 18 April.


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