Tesco has said its Asian business remains “robust” and “well-positioned” for growth, despite the region recording a fall in earnings in the retailer’s first half.
The UK’s largest retailer this morning (2 October) revealed a 12.4% drop in earnings in Asia, citing trading restrictions in South Korea and “disappointing” like-for-like sales in Thailand.
Chief executive Philip Clarke said the impact of “tough” global economic conditions competitors that are “improving their game” and Tesco’s bias towards larger stores all affected its results in the region.
“In addition to the cyclical challenges in stores, we also face the increased rapid online growth practically everywhere we trade. As a result, the emerging improvements in the UK are being masked by the effects of these combined challenges.”
Clarke told analysts at the firm’s earnings conference today Asia continues to be restricted by opening hours in South Korea, while Thailand has “moved quickly” into recession.
“This has been exacerbated in the retail sector by the Government’s efforts to drive domestic consumption with cheap financing of big ticket purchasing. The level of competitor openings has also increased. While we launch dot.com, grocery, banking and Express stores, others have accelerated their programmes, particularly in the convenience sector,” he said.
However, the Tesco chief executive admitted the retailer had made errors in some areas. “This includes a number of unsuccessful changes to the merchandising of our ‘Clubpack’ range of bulk-buy products. We have now taken steps to address these and expect improvements in second half.”
Alongside its results this morning, Tesco announced it had signed “definitive” deals to merge its Chinese business with local retailer China Resources Enterprise – a deal announced back in August.
“The deal with CRE is almost entirely consistent with our approach to these high growth markets. We want to refocus on a profitable, less capital intense approach to accessing [China]. This is a step towards and not a step away from the opportunities in China,” Clarke said.
“The joint venture gives us a clear route to sustainable, profitable growth in the world’s most populous market. It allows us to focus more of our strength on the UK, establishing multi-channel leadership and disciplined international growth.”
Clarke said that while he expects Asia year-on-year sales to remain “volatile” in the coming months, he expects a return to profit in the second half.
“Our direction is right, our journey is under way and we know our momentum will quicken. Our Asia business remains robust and well-positioned for growth.”