Tesco's profits sliced by almost a quarter in past six months

UK's biggest supermarket experiences falling sales in every country in which it operates and sells fewer property assets

Tesco's profits crashed by nearly a quarter in the last six months as the UK's biggest supermarket suffered falling sales in every country in which it operates. Underlying sales slipped back as the grocer struggled to cope with widespread economic problems and a worldwide shopping shift away from the large hypermarkets, historically favoured by Tesco, to local corner shops and the internet.

A large slice of the decline was the result of Tesco selling fewer property assets than a year ago, but even excluding that, profits fell more than 7% to £1.4bn. The biggest decline was in Europe, where profits fell by more than 70%. Analyst Clive Black at Shore Capital described that decline as "atrocious".

Tesco admitted it faced "continuing challenges" as it attempts to improve its image with British shoppers and reshape its international business after an ambitious expansion programme.

"There's a massive shift in retail," said Philip Clarke, the chief executive, as he revealed that Tesco was now operating online grocery stores in 50 cities in nine markets outside the UK and planned to focus on opening smaller stores in nearly all its territories.

The profit slump in Europe, excluding the UK, is particularly painful. Slovakia, Hungary and the Czech Republic face continuing economic pressures and Tesco admitted it had got its strategy wrong in Poland and Turkey, where underlying sales dived by 6.4% and 12.8% respectively over the last six months compared with the same period a year before.

There were further problems in Asia, with profits in South Korea dented by £40m as a result of tighter government rules on trading hours.

Yesterday Tesco confirmed plans to put its 134 Chinese stores into a joint venture with the state-backed China Resources Enterprise. The UK retailer will pay £345m for a 20% stake in the joint venture, which will require state approval.

The move is a humiliating reversal for Tesco, which had huge ambitions to expand in China. Clarke revealed that its underlying sales in the fast-growing market had declined by 3% and the venture lost £72m in the past six months alone. The company said it had spent more than £1.3bn on assets in China and had made trading losses of more than £70m in each of the last two years as it tried to forge a role in the massive market.

The Chinese joint venture is part of Clarke's strategy to stem mounting overseas losses. He has also pulled out of Japan and has axed the US business, which has cost £1.7bn in investment and trading losses. Tesco is selling its California-based Fresh & Easy chain to billionaire Ron Burkle.

Tesco is reviewing its operations in the Turkey and India, but Clarke said the company was committed to its other international operations. "We chose to exit Japan and the US because we had small market shares in markets with very strong competitors. The path to profitability would have taken far too long. They were developed markets, but developing markets bring with them good market growth," he said. Clarke added that the European businesses had strong market shares and would pick up when the economic environment improved.

"Tesco's chief executive must be thinking about entering the Rio Olympics' weightlifting competition given the amount of 'heavy lifting' that he has had to engage in over the last three years," said Clive Black. "More training is going to be required before the corporate bar feels less heavy."

Finance director Laurie McIlwee said Tesco would "start to approach" its aim of about 5% growth in profits next year as trading improved in the UK, which is by far its most important market.

He said profits in the UK would improve as it moved out of shop space devoted to electrical products and concentrated on more profitable items such as toys, health and beauty, and stationery. "I don't think it's getting worse. We are making the right moves and will make strong progress in the second half of the year," McIlwee said.

Tesco is battling to stem falling market share and underlying sales in the UK by investing more than £1bn in revamping stores and improving customer service. Yesterday, however, it admitted that so far, underlying sales remained poor – down 0.5% for the half-year as the supermarket faces tough competition from upmarket rivals such as Waitrose and Marks & Spencer as well as discounters such as Aldi and Lidl.

But Clarke insisted sales were improving, as they had been flat in the second quarter. He said food sales had risen 1% as customers welcomed improvements to 8,000 products over the past 18 months and the Price Promise promotion, under which shoppers receive vouchers if they could have bought a basket of items cheaper at any of Tesco's three main rivals.

Online sales also continued to grow strongly, up 13% in the half, as Tesco rolled out drive-through collection points to nearly 200 locations.

Rival's success
Sainsbury's 'quality and service' underpin improved sales growth

While Tesco has problems in almost every part of its empire, rival Sainsbury's unveiled a step up in sales growth over the summer.

The UK's third largest supermarket said underlying sales – which exclude benefits from new store space – were up 2%, excluding fuel, in the 16 weeks to 28 September, as it successfully fought off competition from discounters and larger rivals Tesco and Asda.

Enjoying his moment of glory over rival Tesco, chief executive Justin King said that Sainsbury's was out-performing the market because of "great standards of service and availability in stores" and its investment in high-quality own-label products.

He conceded that virtually all of the supermarket's shoppers were likely to visit discounters such as Aldi and Lidl, which have been enjoying rapid growth in the past few years. But he said that some of Sainsbury's best-performing stores were situated close to Aldi outlets as the supermarket was able to offer prices that were "pretty sharp" on the same quality of goods.

The retailer's in-house brands such as Taste the Difference and By Sainsbury's grew at twice the rate of third-party brands as shoppers looked to save money. Clothing sales were also strong, growing at twice the pace of food.

Sales growth at convenience stores stepped up from 15% to 20%, which King attributed to the warm summer weather. However, online sales growth slipped back from 20% to 15% and King suggested that shoppers had preferred to be out in the sunshine rather than waiting at home for deliveries.

Sainsbury's position in the fast-growing online and convenience-store sector as well as its emphasis on quality – which kept it out of the horse-meat scandal – has ensured that the chain is the only one of the UK's "big four" grocers to increase market share in the past year.

Looking forward, King said he was encouraged by signs of economic recovery, but added: "The reality is household budgets are under pressure. Inflation is 3% and wage rises are barely 1%.

"We know by listening to customers that they continue to find challenges in their weekly budget, and shopping habits they developed in the downturn are likely to persist."

In that environment, Sainsbury's is expecting shoppers to switch to own-label and enjoy a "stay at home" Christmas as they continue to try and save money in a tough market.

Mike Coupe, Sainsbury's commercial director, said: "We think it will be a stay-at-home Christmas. Because Christmas is on a Wednesday we think people will have an extended holiday and spend time with their family."

King said he still expected strong spending in December as shoppers were saving money on their weekly shop so that they could splurge on special occasions.

Price competition between the supermarkets remains stiff and Sainsbury's is continuing to pursue a complaint about Tesco's Price Promise promotion, which claims to compare the cost of goods at rival chains, even own-label items.

The advertising watchdog has ruled that it is not unfair for Tesco to compare its own-label bananas with Sainsbury's Fairtrade ones, but the ruling is being appealed.

King said: "We think there is an important principle here, that it should not be for any individual retailer to determine whether they consider what they sell to be comparable. We believe the comparisons Tesco are making ignore the quality difference between our products."

Article Source : http://www.guardian.co.uk

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