Tesco chief executive Sir Terry Leahy today (21 April) insisted the UK retail giant would continue to expand in the US but admitted the downturn had held back its ambitions across the Atlantic.
The company today reported that losses from its Fresh & Easy business in the US had risen over the last fiscal year. Trading losses stood at GBP142m (US$207.6m) for the 12 months to 28 February, up from GBP62m a year earlier.
Tesco has decided to slow the pace of its expansion in the US, which has lead to its sales in the country being lower than forecast at GBP208m.
Sir Terry said the weakness of the sterling had been a factor in the increased losses at Fresh & Easy. The Tesco boss also said establishing a business in the US had led to a series of “up-front” investments.
Nonetheless, Sir Terry admitted that the downturn had meant Tesco was now opening “one or two stores a week” in the US, “a more rapid rate of growth than our competitors” but down from previous targets.
“I don’t have any regrets about the strategy but I have regrets about opening in a recession,” Sir Terry said, adding, however, it had been impossible to predict when the downturn would hit the economy.
He said the problems in the US economy, including the growing number of foreclosures and rising unemployment, had meant populations had fallen in some parts of the western US, where Tesco has until now focused its business Stateside.
Sir Terry insisted, however, that US consumers were taking to the Fresh & Easy business. “I’m very pleased with the promising start we’ve made. I see plenty of encouraging signs. [Consumers] understand the format.”
Amid the downturn, sales of own-label products have risen tin the US, which has not been a traditionally strong market for private-label products.
Sir Terry said, however, that Tesco was in discussions with its branded suppliers in the US about changing what is sold in the Fresh & Easy outlets in terms of pack size and prices.
“The sales of own-brand have been high for America [but] sales of manufacturers’ brands have not been as high as they should have been,” he said. “Manufacturers saw Fresh & Easy as a convenience format. It’s a one-stop shop.”
Tesco’s plans for organic growth in the US may have been scaled down but the company is unlikely to make targeted acquisitions of local retailers to expand its business, Sir Terry said.
“I don’t think we would consider acquisitions in the US because [Fresh & Easy] is a very specific model,” he said. “That doesn’t rule out acquisitions of clumps of property and that comes up quite a lot in the US.”
At 15:04 BST this afternoon, shares in Tesco were up 4.3% at 346.5p.
Earlier today, Tesco reported a 10% rise in annual underlying pre-tax profits.
The company, the world’s third-largest food retailer, booked underlying profit before tax of GBP3.13bn for the 53 weeks to 28 February. Stripping out the impact of the extra selling week, profits rose 8.8%.
Group revenue excluding VAT rose 13.4% on a 52-week basis to GBP54.3bn. Tesco’s international sales rose by 13.3% at constant currencies as the company saw its growth in Asia accelerate on the back of the Homever acquisition in South Korea.
In the UK, where Tesco’s sales growth has lagged rivals including Asda and Morrisons, sales increased by 9.5% to GBP41.5bn. On a like-for-like basis, UK sales rose by 4.3%, which included a contribution of 2.1% from the 53rd week.