Tesco has said its target to make its US Fresh & Easy business break even by the end of the 2012/13 financial year will not now be achieved.
In April last year, Tesco CEO Philip Clarke said it was “essential” that losses from its US business Fresh & Easy come down during the year after the division’s bottom line worsened over the previous 12 months.
Reports at the time had suggested Clarke forecast Fresh & Easy would turn a profit by the end of 2012/13. However, after announcing Tesco’s annual results yesterday (18 April), the CEO said the retailer had been “misquoted”. The actual target was to break even, which Tesco would miss, Clarke said.
“We won’t achieve that, we’re not going as fast so that target has gone,” Clarke said.
The retailer said it now anticipates the point will be reached during the 2013/14 financial year.
Tesco finance director Laurie McIlwee told attendees: “That is a function of how this goes and in the last financial year we only opened 20-odd stores in the US, that was by decision, by design, that was to make sure we have the store-by-store operating right so when we scale it up there is profitability and not loss.
“If we’d opened more stores we probably would have made more losses than we have, so it’s merely pushing out the break-even point at the bottom line. We are breaking even at the end of this financial year, so we cover our distribution costs, stores costs, we’ve got our overhead which is our central office and buying teams that supports the stores, that’s the bit that we’re not going to break through in this financial year.”
The UK retailer’s annual results had revealed that its losses in the US, a market it entered in 2007, had narrowed in the year to the end of February.
Fresh & Easy made a trading loss of GBP153m (US$245m) in the year to the end of February, a 17.7% improvement on a year earlier. Sales climbed 27.1% to GBP638m.
Tesco has faced calls from some analysts and investors to quit the US and Clarke was asked if the retailer would provide a timetable for any potential exit.
“I don’t feel I need to,” Clarke said. “I feel we’ve laid out precisely what we consider the measures of success are and that is more stores and getting to profitability, and when we get there we’ll say some more about it.
“Every market you go in to you’re not every sure when you get in whether you’ll get there. We exited Japan, pulled out of Taiwan and I was going to pull out of Malaysia but now we’re market leader in Malaysia and generating good profits.”
He added: “We entered America at a time when the economy was growing, consumers were confident. Everybody in the world had a tailwind that was pushing them along, then bang came the headwind. Sure, the offer could have been different, but because it’s such a unique business, because we’ve got such extraordinary capability, because the market opportunity is real, I feel we need to persuade our investors that we can get there. We’ve got more stores in profitability now and more about to cross the line.”
Tesco currently has 30 out of 186 Fresh & Easy stores that are profitable.
“I think we’ve got to prove to everybody that the business we have can break even,” Clarke insisted. “I don’t need to go and spend hundreds and hundreds of millions to do another hundred [stores]. What I need to do is demonstrate to shareholders who have been very very patient with us that we can get there. I think we will.”