UPDATE 2-Tesco unveils 1 bln stg plan to revive UK business

Wed Apr 18, 2012 3:47am EDT

* CEO says plan not a radical change of direction

* To cut group capex to 3.3 bln stg from 3.8 bln stg

* New space added in UK to be 38 pct lower than last yr

* U.S. business to break even later than planned

* Shares up 1.7 percent

By James Davey and Paul Hoskins

LONDON, April 18 (Reuters) - Tesco, the world's No.3 retailer, said it would spend 1 billion pounds ($1.6 billion) this year overhauling its underperforming British business and will rein in expansion as it seeks to win back market share and calm nervous shareholders.

Shares in Tesco rose nearly 2 percent on Wednesday after it said the blueprint to revitalise its most important market, which it conceded was not a radical change of direction, would focus on improving staffing levels, smartening up stores and delivering better prices and product ranges.

But the focus on stemming falling sales in the UK and refreshing existing stores means overall group capital expenditure will be cut to 3.3 billion pounds in the coming year from 3.8 billion last year. This will mean new space added in Britain in 2012/13 will be 38 percent lower than in 2011/12.

"I'm announcing today our 1 billion pounds plan to put the heart and soul back into Tesco," Chief Executive Philip Clarke told reporters on a conference call after the group reported a small full-year profit rise that met market expectations.

"The plan isn't radical, isn't a radical change of direction, but it's a radical change of pace - more staff, better quality and range, warmer stores, friendlier service and a determination to do the basic things better," he said.

Tesco dominates Britain's grocery sector with a 30 percent market share but in January issued its first profit warning in over 20 years and according to industry data is still losing market share.

Last month Clarke, who succeeded long-standing boss Terry Leahy in March 2011, jettisoned the head of the firm's UK business, adding that role to his other duties and shouldering the day-to-day burden of getting the business back on track.

He would not say how long it would take for the UK business to return to underlying sales growth and historic market share levels. "I don't want to be pinned on imposing a false precision," he said.

Shares in Tesco, which prior to Wednesday's update had lost 22 percent of their value over the last six months, were up 5.6 pence at 333.9 pence at 0722 GMT, valuing the business at 25.3 billion pounds.

"Tesco will maintain a rate of (space) growth approaching that of the market, but with the onus on driving like-for-likes (sales), returns and free cash flow from its existing portfolio," said analysts at Nomura.

"We view this development as a clear positive for Tesco and UK grocery."

FRESH & EASY

Tesco also said its Fresh & Easy business in the United States would break even later than previously anticipated.

"Our focus was to push the pace of expansion to reach breakeven (towards the end of the 2012/13 year). I've decided now to focus on making the stores we have profitable first before pushing ahead with further higher levels of expansion," said Clarke.

The uphill task he faces mirrors that of Georges Plassat, incoming CEO at Carrefour, who takes the helm at the world's second biggest retailer in June with a brief to turn around the group.

Carrefour, hit by both the euro zone crisis and longer-term structural problems, last week reported a plunge in demand for discretionary purchases and a deteriorating performance at its core French hypermarkets.

Tesco said group profit before tax and one-off items rose 1.6 percent to 3.9 billion pounds in the year to Feb. 25 2012.

That was broadly in line with an average forecast of 3.88 billion pounds, according to a poll of 20 analysts compiled by the company, and up from 3.81 billion pounds made in the 2010/2011 year.

Trading profit in Britain, where Tesco accounts for about one in every 10 pounds spent in shops and makes over 70 percent of its trading profit, fell 1 percent, with sales at stores open at least a year falling 1.6 percent in the final quarter.

To see an interview with Tesco CFO Laurie McIlwee please click on

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