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May 6, 2011

US: Californian bill could accelerate Tesco exit – analyst

A Californian bill that may ban the sale of alcoholic beverages at self-service checkouts could accelerate Tesco's exit from the US, an analyst has said.

A Californian bill that may ban the sale of alcoholic beverages at self-service checkouts could accelerate Tesco’s exit from the US, an analyst has said. 

MF Global analyst Mike Dennis said today (6 May) that the bill, if passed, could mark the “beginning of the end” for Tesco’s troubled Fresh & Easy venture.

The UK retailer is considering what to do with its loss-making US business and recently saw losses widen by 9.7% to GBP186m in 2010.

“The bill [is] nicknamed ‘Tesco Fresh & Easy Law’ because Tesco’s Fresh and Easy has 126 stores out of 175 in California and, is the only grocery chain that offers only self service checkout and not the full service options that you would get in Stater Bros. or Safeway Inc,” Dennis said.

He said that the retailer offers beer, wine and spirits in all of its California stores, which means it will need manned checkouts by law in order to sell alcohol.

“Tesco already has a high fixed cost issue with very weak sales densities and a limited, if 0%, gross margin in many stores due to voucher discounts,” he added.

“The bill, proposed by California Assemblywoman Fiona Ma is similar to legislation passed in 2010, but vetoed by Republican governor Arnold Schwarzenegger,” said Dennis. However, this time, the analyst said, “we do not expect the California Governor, Jerry Brown, to veto the bill”.

Dennis suggested that Tesco CEO Philip Clarke will have to review its US operations this summer as “costs rise and sales fail to materialise in northern California”.

This is not the first criticism the retailer has faced this week around its US venture. earlier this week, US billionaire Warren Buffett said the retailer was “foolhardy” in its attempts to enter the market.

Meanwhile, the vice chairman of Buffett’s investment vehicle, Berkshire Hathaway, Charlie Munger said: “‘I’m not critical, I just think it’s difficult to be a new boy. Tesco is God Almighty in England. But you come into southern California and you have Trader Joe’s and Costco – that’s tough competition.”

Alongside the retailer’s results in mid-April, Clarke said it was “essential” that losses come down in the division, and that he is forecasting Fresh & Easy will break even at the end of 2013, when it reaches 300 stores.

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