* CEO wants UK turnaround plan to move faster
* CEO effectively abandons UK operating margin target of 5.2
* CFO says firm does not want to give "false sense of
* Plans to invest additional 200 mln stg on UK price cuts
* Tesco shares close up 0.5 pct
By James Davey and Neil Maidment
LONDON, Feb 25 Britain's Tesco, the
world's third-largest retailer, is to cut prices as it relaxes
its view on operating margins and steps up its store revamp
programme and investment in online and convenience channels.
Outlining his plans at an investor and analyst seminar on
Tuesday, Chief Executive Philip Clarke said the measures
accelerate a turnaround plan aimed at countering increased
competition in the British retail market, but which has so far
failed to boost its languishing sales.
"This doesn't signal a need for a new strategy, simply to go
faster," Clarke said.
He effectively abandoned Tesco's target for a UK operating
margin of 5.2 percent, the highest in the industry, by saying
"the margin will be what the margin will be."
At a later media briefing Chief Financial Officer Laurie
McIlwee said the firm would not be giving a new target because
of uncertainties in the grocery market due to more competition
and structural changes.
"If I was to give you a margin it would be a false sense of
precision. We need the space to operate, we don't want to be
backed into a corner," he said.
While not signalling a return to the "pile 'em high, sell
'em cheap" mantra of Tesco founder Joseph Cohen, sacrificing the
target signals that Tesco will make less profit from its revenue
as it chases higher sales volumes with lower prices.
In common with Britain's three other leading grocers -
Wal-Mart's Asda, Sainsbury's and Morrisons
- Tesco is being squeezed between the hard discounters
Aldi and Lidl and upmarket grocers
Waitrose and Marks & Spencer, losing market
A commitment to reduce promotions and invest an additional
200 million pounds ($334 million) cutting prices on basic
products like carrots and cucumbers will be seen as a direct
response to the rise of the discounters as well as moves by its
biggest rivals. Asda, for example, has pledged to spend more
than 1 billion pounds on price cuts over the next five years.
BOLDER AND BRAVER
Tesco is 22 months into the turnaround programme for its
3,150 British stores, having already spent more than 1 billion
pounds on refits, more staff and new product ranges, yet
underlying sales at stores open over a year fell 2.4 percent in
the Christmas period and, according to monthly industry data,
have continued to fall.
Shares in Tesco, down 10 percent over the past year, were
little changed by the close, finishing up 0.5 percent at 335.7
pence, valuing the business at about 26.9 billion pounds.
"If there is no data showing (the) current plan works, why
accelerate the plan," asked Bernstein analyst Bruno Monteyne.
"They need to be bolder and braver," he said.
The overall approach to growth and returns set out last year
remains the same, Clarke said, targeting mid-single-digit annual
growth in trading profit, return on capital employed (ROCE)
within a range of 12-15 percent and dividend growth broadly in
line with underlying earnings, with a target cover of more than
Tesco, which makes about two thirds of its revenue in
Britain, has suffered more than many rivals because it has more
large stores and traditionally sold a higher proportion of
large-ticket non-food items, such as domestic appliances, where
shoppers cut back most in an economic downturn.
To address that, Clarke has refocused the company's non-food
offer on higher-margin categories, such as clothing and
homewares, though only about a third of its huge Extra stores
have been refurbished so far. Tesco said the Extra format will
be a priority for 2014, with 110 slated for refits.
Clarke also plans to open 150 convenience stores a year,
while other initiatives include a planned doubling of
click-and-collect locations and the expansion of a scheme
allowing loyalty card holders to save money on fuel.
The group, which trails France's Carrefour and
U.S. giant Wal-Mart in annual sales, also said it would
reduce net new space significantly, resulting in lower overall
Having given guidance for net new UK space of about 1.4
million square feet for 2013/14, it plans a further reduction to
0.7 million sq ft in 2014/15.
Group capital expenditure will drop to no more than 2.5
billion pounds a year, its lowest level for 10 years, for at
least the next three financial years. Tesco had previously
indicated a figure of 3.2 billion pounds for 2013/14.
Other big European retailers like Carrefour and Metro
, facing many of the same challenges as Tesco, have
also slashed capex in recent years but have both started to
increase investment again, although they are still spending less
than Tesco as a percentage of sales.
Clarke reiterated that the pursuit of disciplined
international growth remained a priority. On Monday Tesco said
it was in talks about a possible restructuring of its business
"Overall this is the 'middle way' message we expected ...
nothing that should cause panic across the industry," Deutsche
Bank analyst James Collins said.