It was a surprise to see that Tesco was the biggest faller on London’s FTSE index of 100 leading shares yesterday (20 April).
Okay, Tesco boss Terry Leahy did not give much away (indeed, compared to Sainsbury’s energetic frontman Justin King and ex-Morrisons’ and now M&S’s smooth chief Marc Bolland, Leahy was as inscrutable as ever) but there was enough in the UK retail giant’s results and outlook to leave investors feeling confident about the group’s future.
Tesco, the UK’s largest grocer, has beaten off competition from hard discounters Aldi and Lidl with a combination of its own discount own-label range and bigger carrots for holders of its Clubcard loyalty card.
Leahy said Tesco was now “growing faster than the industry” and added: “We’ve got back in the lead in a pretty competitive race. We’ve not done it in an unsustainable way. Some of our competitors have been using short-run tactics that work for a while but which are hard to keep up.”
Nonetheless, some industry analysts were cautious about Tesco’s core UK grocery business, with one arguing that the company had yet to find any “momentum” from that part of its operations.
However, to be overly critical of Tesco’s UK food business is a bit churlish when the company is almost twice the size of its nearest competitor – and has performed better in recent months than some in the sector.
Tesco also has plenty of room for growth both in non-food in the UK and internationally.
Days after arch-rival Asda said it planned to bolster its non-food Asda Living stores, Leahy emphasised that Tesco, too, wanted to expand. And, in a rare slip of his guard, Leahy mocked Asda’s plans for expansion.
“I know that Asda said they would open 150 Living stores. I think five years ago they said they would open 300, so I couldn’t work out if that was an increase or a decrease,” Leahy sniffed. “You have to take these figures with a pinch of salt.”
Tesco, with its tentacles in everything from CDs and video games to opticians, phones and banking, insist there is “plenty” of room for its non-food business to grow. And, while back in late 2008 and early 2009, commentators might have accused Tesco of taking its eye off the ball in grocery, management seems to have got its house in order again on food.
Internationally, too, some may have issues with Tesco. The retailer’s Fresh & Easy business in the US is still loss-making, although finance director Lawrie McIlwee said yesterday those losses were “flattening out” – and was swiftly followed by Leahy’s insistence that Tesco would open more stores Stateside this year.
Ireland was also a problem for Tesco in the first six months of its fiscal year. Back in November, Tesco said first-half like-for-likes in Ireland had tumbled 18%. Yesterday, Leahy said like-for-likes had recovered to “strongly positive numbers” – no mean feat in a country where the retail sector is very much in a slump.
However, it was further afield that Leahy sought to demonstrate the growth Tesco is achieving overseas and the potential growth the business could generate.
Leahy said Tesco’s Homeplus business in South Korea was now a “major engine of growth for the group” and, with sales of around GBP4bn (US$6.17bn), reminded him of where Tesco’s UK business stood in the 1990s. “In ten years in Korea, we’ve done what took us 60 years in the UK,” Leahy said.
Leahy then pointed out that, for Tesco’s South Korean business to achieve the market share the company enjoyed in the UK, it would need to quadruple in size.
So throw Korea into a pretty robust mix of growth in non-food and a turnaround in the UK, investors should be looking at Tesco’s future – and its future share price – with confidence.