* 1 bln stg UK fightback plan is one year old next week
* Changes starting to make impact, trend still uncertain
* Analysts' consensus sees 2012-13 profit down 10.7 pct
* Higher dividends, share buybacks possible
By James Davey
LONDON, April 12 After a decade pushing its
non-food business, Tesco, Britain's biggest retailer is
changing, and a conspicuous focus on fresh produce greets
shoppers at its newly styled superstores.
"Customers were saying they felt we didn't have the right
products in our shop," said Kiran Sudan, store manager at the
recently refurbished Kensington superstore in west London, whose
catchment area is a multi-cultural mishmash of affluent
dwellings and social housing.
Floor space for general merchandise, such as electrical
items, has been cut by over two thirds at her store, part of
Tesco's fresh food drive, which has introduced an additional
2,000 grocery lines and a recognition that the future of
non-food retail is largely online.
So far around 400 of Tesco's 3,000-plus British stores have
been refreshed, with wider aisles, warmer natural colours and
wood cladding, and an array of fresh food counters.
In her 30 years at Tesco, Sudan has witnessed phenomenal
success under Terry Leahy, chief executive from 1997 to 2011,
when double digit yearly profit growth was the norm, and the
recent stumble under his successor Phil Clarke.
Founded by Jack Cohen in 1919 as a group of east London
market stalls, Tesco, which now turns over 65 billion pounds
($100 billion) and employs more than half a million people
worldwide, was one of Britain's most consistent companies in
terms of earnings growth, until it issued its first profit
warning in over 20 years in January last year.
The breakneck expansion model couldn't keep delivering.
"We've run too hot for too long," Clarke acknowledged.
For Mark Pooley, store manager at the Tesco Metro
convenience store on Tooley Street, near London Bridge, Clarke's
words were a turning point.
"Someone saying, 'We realise this needs to change, and we
will do something about it' created a positive feeling in the
business," he said.
Last April, Clarke, who began his Tesco career aged 14,
stacking shelves in a store managed by his father, launched a
billion pound plan to reverse years of underinvestment in
existing British stores and stem a steady loss of market share
to rivals like Wal-Mart's Asda and J Sainsbury.
Tesco, the world's third-largest retailer after Wal-Mart and
Carrefour, remains the market leader in Britain, which
accounts for over 60 percent of group revenue and profit, but
its grocery share has slipped to 29 percent from a peak of over
31 percent in 2007.
Its 3.6 million square metres (39 million square feet) of
floor space still accounts for one in every 10 pounds spent in
British shops, but it is switching from a space-hungry,
expansionary business to one focused on making the most of
existing stores, improving returns on investment and better cash
In January, Clarke said Tesco was "back on form" in Britain,
with underlying sales growth of 1.8 percent for the six weeks to
Jan. 5, its highest in three years.
Though it has stepped up investment in existing British
stores and online, overall group capital expenditure is falling,
coming down from 3.8 billion pounds in 2011-12 to 3.3 billion in
2012-13. The key driver of this is 38 percent less space opening
in Britain in 2012-13 than in 2011-12.
For a decade its average capital expenditure was about 6.5
percent of sales, but now it is targeting less than 5 percent
and an increase in return on capital employed (ROCE) from 13.3
percent in 2011-12 to 14.6 percent by 2014-15.
All this means Tesco will have more free cash, which could
mean higher dividends and share buybacks a few years down the
track. Analysts at Deutsche Bank reckon Tesco could return 1.6
billion pounds per annum from 2016.
"This business is generating huge amounts of capital still.
If they are not using that, it's much better in our hands than
in theirs," said Charles Heenan, investment director at Tesco
ONE YEAR ON
With the turnaround a year old next week, about 8,000 new
staff have been recruited and trained, and existing staff
re-trained. Own-brand food products have been re-launched,
promotions have become more personalised and a new
price-comparison initiative has been introduced.
Clarke has also accelerated investment online, rolling out
Click & Collect services to about 1,400 stores, where customers
can use their PCs, tablets and smartphones to order from a range
of 200,000 non-food product lines for pick-up in store.
At Tooley Street, Pooley is seeing an impact.
"Last week, outside of an Olympics week last year, was my
best sales week ever," he said.
The refit of his Metro convenience store shrank the size of
the checkout area but provided a bigger salad bar popular with
city workers and extra space for health and beauty products.
Bahar Maulod, a teacher shopping in the Kensington
superstore, said it looked more organised.
Housewife and mother of three Susan Hakme also liked the new
look, though, demonstrating that no change is without pitfalls,
she said she found the cafe too expensive and complained that
"they should have done clothing" and had got rid of children's
Though there are encouraging signs, a better trend is by no
means settled, with analysts forecasting flattish underlying UK
sales growth for Tesco's entire fourth quarter, with trading
possibly hit by a Europe-wide horsemeat scandal, which found
that some beef products sold by Tesco and other grocers,
including Asda, contained horse.
"Christmas trading was acceptable, certainly not a disaster,
but it's not like they're hitting any home runs yet," said
Though Tesco's shares have increased 18 percent over the
last six months, they trade on 12 times forecast earnings, below
Sainsbury's 12.6, Wal-Mart's 14.3 times and Carrefour's 14.7,
according to Reuters data.
Clarke's plan will take time to boost profitability.
The group made underlying pretax profit of 3.92 billion
pounds in its 2011-12 year, up 1.6 percent. According to a
consensus of analysts' forecasts that will fall 10.7 percent to
3.5 billion pounds in 2012-13, reflecting the cost of the
turnaround plan, the impact of the euro zone debt crisis on
eastern European markets, regulatory issues in South Korea and
losses in the United States, which Tesco is expected to exit.
But with analysts forecasting that Tesco will see profit
rises of 3.7 percent and 7.7 percent in the following two years,
Clarke may yet win the affection of investors.
"You should never count them out," said the boss of one of
Tesco's British rivals.