Will Tesco be deposed as retail king?

 
Fresh and easy store in US - opening day

Tesco has probably had worse or more humiliating days. But not for a long time.

Pulling out of the US, with the abandonment of its Fresh & Easy venture, is costing it £1.2bn in money and probably as much again in loss of face.

Because of that loss, and the cost of revitalising sluggish British stores, profits have fallen dramatically - by 52% to £2bn before tax.

Even so-called underlying profits - which exclude a write-down of the value of property in the UK, a devaluation of businesses acquired in Poland, the Czech Republic and Turkey, and an increase in PPI compensation costs - have fallen 14.5% to £3.5bn.

Here is the thing: this is the first drop in reported profits at Tesco since 1993-94.

But how different the world was for Tesco 19 years ago.

Back then it was about to embark on a programme of expansion and sales promotion that would turn it into the UK's most powerful retailer (by far).

It was the challenger to the then leaders in both food and non-food, Sainsbury's and Marks and Spencer, and it was to squeeze them both till more than the pips squeaked.

Today, Tesco still looks for and enjoys growth in Asia, and online.

Unwieldy

For all the mess it made of the US, it is still an unusual British business and British retailer in having made a success of initiatives in parts of the world where retailing culture and practice are very different from the UK (although a recent bashing in South Korea, due to regulatory changes, shows there will always be downs as well as ups).

However, in the UK its huge market share now makes it look less like an unstoppable juggernaut and more like a massive tanker that's hard to manoeuvre quickly or easily.

And in recent years Tesco has become vulnerable to attack from discounters like Aldi, old foes such as Sainsbury's and newer ones like Amazon.

That said, there have been signs in the past year that Tesco's costly investment to improve service and stock in British stores has stabilised the business. There has been a return to very modest growth in underlying or like-for-like sales in the second half of 2012-13, in spite of recent weeks' headwinds from horse in the mince, although growth at Sainsbury remains faster.

But here is the big change at Tesco, with which it is gradually coming to terms.

For years its success was built on its entrenched view of itself as the upstart pretender, running rings around the old retailing establishment.

Today it is the retailing establishment, which makes it the target rather than the challenger - and all the more vulnerable in an economic climate that is likely to remain inclement for years.

So it is a big moment for the company.

The chief executive, Philip Clarke, has had to reconstruct Tesco at home and abroad at considerable cost - which is what is visible in today's announcement that profits have halved.

The legacy he inherited from his garlanded predecessor, Sir Terry Leahy, has been considerably less benign than he expected - although the big reconstruction decisions are Clarke's and he will stand or fall on whether they work.

If serious recovery doesn't materialise at Tesco this year, questions will start to be asked - just as they were in the 1990s about M&S and Sainsbury - about whether Tesco's time as king of retail is over.

Update 08:25 BST

By the way, Tesco's pre-tax profit of just under £2bn does not include the costs of withdrawing from the US or its US trading losses.

Its American venture is being treated, for accounting purposes, as discontinued, so all its losses are being charged below the tax line, in its profit-and-loss account.

What this means is that, after tax, Tesco barely made a profit at all.

Here is the astonishing number: Tesco's post-tax profit was a paltry £120m, down 95.7% from the previous year.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 425.

    303 and others: if I choose to shop there because it is convenient, that's my choice, I am the customer and the customer is always right.

    No business and no business model has any claim on the loyalty of its customers. High Street shops have no divine right to protection from supermarkets - nor brick-and-mortar shops from online traders.

  • rate this
    0

    Comment number 424.

    Loads of comments about miserable/unhappy staff in Tesco. They are paid pittance wages which are predicated on benefits and child tax credits etc. So Tesco et al are not just screwing their staff but also their customers and tax payers who would not dream of stepping into their stores. They would never get the once proud Investor in People award!

  • rate this
    0

    Comment number 423.

    411.Keith
    hard lesson for Tesco, USA is a different culture people have shopping habits which are completely different
    ~
    Analyst on R4 said Tesco put 'Metros' in LA where superstores in malls get all the business; they should have gone to NY, etc.

  • rate this
    +2

    Comment number 422.

    I heard Sir Mike Darrington on BBC R2 today.
    He was Cheif Exec until 2008 and was the driving power behind the success of Greggs.
    He spoke lots of common sense which appears to be contra to the Tesco model, witnessed by the success of the business.
    The main point that I got from the broadcast was - look after your staff and they will in turn look after your customers.
    Tesco need to learn.

  • rate this
    +1

    Comment number 421.

    #409 "Planning gain" is bribery by another name.

 

Comments 5 of 425

 

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