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  1. Analysis
April 1, 2008

Teething troubles or turmoil at Tesco?

Tesco, for so long a case study in how to succeed in UK retailing and expand overseas, is facing accusations that it is losing its touch. Speculation over its US business and signs of a lacklustre performance in the UK have generated uncertainty around the company. Dean Best reports.

By Dean Best

Tesco, for so long a case study in how to succeed in UK retailing and expand overseas, is facing accusations that it is losing its touch. Speculation over its US business and signs of a lacklustre performance in the UK have generated uncertainty around the company. Dean Best reports.

A fortnight today, Tesco chief executive Sir Terry Leahy will stand up in London to unveil the UK retail giant’s financial results for 2007.

Under the Liverpudlian’s stewardship, Tesco has outpaced and out-thought its rivals to become the largest retailer in the UK and, according to some estimates, now accounts for GBP1 for every GBP7 spent in the country.

The growth of Tesco has generated intense debate in the UK and the company has faced sustained criticism that its power has pushed smaller retailers out of the market and squeezed suppliers dry. Amid all that, the City has hailed Tesco as a financial success and also praised Sir Terry and the business as it expanded abroad into markets from Thailand to Turkey.

Now, however, one or two questions are being asked about Tesco in financial circles. What was once a well-oiled machine is suffering from one or two glitches, industry watchers say. And when Sir Terry presents Tesco’s numbers in two weeks, those questions will be asked in earnest.

The greatest uncertainty surrounds Tesco’s fledgling US venture, Fresh & Easy. Much to Tesco’s irritation, analysts in the US have queued up to claims that the Fresh & Easy stores are missing Tesco’s internal sales targets. The retailer has dismissed the claims as “scaremongering” and said it has been “encouraged” by the start the business has made.

Nevertheless, the company’s announcement this week that it is putting the brakes on its US expansion plans will, in some quarters, raise further questions about the health of the business. Tesco said the hiatus had always been part of its plans since Fresh & Easy was first launched in November.

Despite the question marks across the Atlantic, one UK-based analyst puts any problems Fresh & Easy may be suffering down to “teething troubles”. “Fresh & Easy has only got 61 stores and the outlets have only been open six months. A pause is eminently sensible. Tesco can sit back and see which stores are performing beyond expectations and see which aren’t,” says Shore Capital analyst Darren Shirley.

US retailing has been a graveyard for UK retailers in the past, and with the US economy in a downturn, it seems the obituary writers are queuing up to pass judgment on Fresh & Easy. Retail analysts in the UK remain enthusiastic about the prospects for Fresh & Easy because they believe that Tesco has found an unguarded niche in the US retail scene. And with Wal-Mart rumoured to be mulling its own small-format stores, it would appear Tesco is on to something.

Doubts over Tesco are not just limited to the US, however. Today’s (1 April) news that Tesco has shelved plans to sell clothing in the UK online has caused some to speculate that the retailer is losing its touch in its domestic market. In reality, there seems to be little sign that Tesco’s UK business is faltering. Christmas trading figures may have suffered in comparison to the likes of Morrisons, but for Shirley, Tesco’s problem is not of its own making but that it is facing resurgent rivals.

“Asda wasn’t trading well, Morrisons had problems digesting Safeway and Sainsbury’s was in recovery mode, although far from its peak period. Tesco was benefiting from that,” Shirley says. “Now, all the companies are moving in the right direction with positive like-for-likes.”

Internationally, Tesco has grand ambitions. The company is hoping to see over 50% of its annual sales from overseas markets within the next decade and has this year outlined expansion plans in some of its key markets, including China and Turkey.

For Shirley, the retailer has fallen victim to “new vacuum” surrounding the company since Christmas. “The Christmas update was below expectations and Tesco doesn’t have a fourth-quarter statement so it gives people a period of time for ammunition,” he says.

Some investors will be ready to fire in two weeks’ time.

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