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Tesco set to call time on costly U.S. adventure

The signage of a Fresh & Easy Express food market is pictured in Burbank, California October 17, 2012. REUTERS/Fred Prouser
The signage of a Fresh & Easy Express food market is pictured in Burbank, California October 17, 2012. REUTERS/Fred Prouser

By James Davey

LONDON (Reuters) - Tesco Plc is set to end its five-year attempt to crack the cut-throat U.S. market and will focus on turning around its struggling home business and on faster-growing emerging markets.

The world's third-biggest retailer said it was reviewing its loss-making U.S. unit Fresh & Easy that could lead to the sale or closure of the 200-store chain that employs 5,000.

"It just became clear to us that the journey to sustainable returns was going to take too long," Phil Clarke, chief executive of the British company, told reporters.

"It's likely but not certain that our presence in America will come to an end," said Clarke, speaking from Los Angeles.

Clarke, CEO since March 2011 and a Tesco lifer who as a youth stacked shelves in his local store, said finding a solution to Fresh & Easy would allow the group to divert resources in more profitable markets.

Some analysts believe the move could represent a fundamental shift in Tesco's thinking.

"The decision on the U.S. is but a first step. We expect Tesco to significantly reduce capital expenditure and focus on cash generation and increasing return on capital employed," said analyst Philip Dorgan at brokerage Panmure Gordon.

Tesco shares, down 20 percent over the last year, were up 3 percent at 337 pence by 7:49 a.m. EDT.

Announcing the review alongside a third-quarter trading update that showed continued pressure in Tesco's core UK market, the group said it would report the review's findings when it publishes full-year results in April.

Tesco, which trails France's Carrefour and U.S. leader Wal-Mart by annual sales, said it had received a number of approaches from parties interested in acquiring all or part of Fresh & Easy, or in partnering with the firm.

Tesco added that Tim Mason, Fresh & Easy's CEO and deputy group CEO, is leaving Tesco after 30 years with the firm.

Investment bank Greenhill will assist with the review.

Having absorbed nearly 1 billion pounds ($1.6 billion) of capital since its 2007 launch when Tesco was run by Clarke's predecessor Terry Leahy, Fresh & Easy has failed to make a profit in a market where it competes with the likes of Trader Joe's and Whole Foods Market as well as Wal-Mart.

FINAL STRAW

Clarke has been under increasing pressure from investors to take decisive action and an easing of Fresh & Easy's third-quarter underlying sales growth to 1.8 percent from 6.9 percent in Q2 may have been the final straw.

Charles Heenan, investment director at fund firm Kennox, who has Tesco as his third-largest holding, welcomed the review. "It would be lovely if they could sell it and make lots of money but I don't think that is likely to happen. I would prefer them to leave completely but if the best they can do is structure some sort of partnership, that's not a disaster," he said.

He added that Tesco should focus on sorting out the UK, where it posted a return to falling quarterly underlying sales, raising questions over whether Clarke's 1 billion pound recovery plan is struggling to make an impact.

Tesco's sales at UK stores open over a year, excluding fuel and VAT sales tax, were down 0.6 percent in the 13 weeks to November 24. That compared with forecasts in a range of down 0.9 percent to up 0.2 percent and with a 0.1 percent increase in the prior quarter, which was its first rise after 18 months of decline.

Clarke said like-for-like sales in food, the main focus of his recovery program, grew 1.2 percent, ahead of the market overall, but conceded a further reduction in underlying sales of non-food categories "was not good enough".

Tesco, which stunned investors in January with its first profit warning in more than 20 years, is battling to regain momentum against a weak UK economy, with consumers fretting over job security and a squeeze on incomes. The firm has suffered more than rivals, in part because it sells more discretionary non-food goods on which shoppers have been cutting back most.

In April Tesco launched a strategy to revive UK sales, investing in more staff, revamped food ranges, smartened stores that give more space to food and refined marketing.

Rivals Asda (part of Wal-Mart) and J Sainsbury Plc have both recently reported sales increases and the only major domestic rival to have reported a decline was No. 4 player Wm Morrison , albeit for different trading periods.

Tesco's woes are not confined to the UK and United States.

In South Korea, its biggest overseas market, underlying sales fell 5.1 percent as legislation allowing local governments to impose shorter trading hours hurt trading, while in eastern Europe underlying sales were down 3.6 percent, reflecting fallout from continued euro zone instability.

(Additional reporting by Sinead Cruise; Editing by Kate Holton and David Holmes)

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