Tesco raises the bar internationally

Date : 09 May 2011
Tesco raises the bar internationally

At his first preliminary results presentation as Group CEO in April 2011, Philip Clarke outlined six fresh strategic objectives to guide Tesco’s short term priorities. One of these raised the bar for Tesco’s international operations, setting a new goal of being outstanding internationally rather than just successful. In this article we explore how Tesco is planning to achieve this ambition.

Tesco’s international operations are already substantial, spanning 13 international markets on three continents, and increasingly, international operations are driving Tesco’s top line. In 2010/11, international revenues grew at 13.8% - over three times the pace of Tesco’s 4.3% growth in the UK. A faster rate of store openings means that before the end of the 2011 financial year, Tesco is likely to operate more stores outside the UK than within its home market. Already, almost two thirds of Tesco’s space is located outside the UK.

Measure

2010/11

Y-o-Y Growth

% of Group total

Revenues*

£20.0bn

13.8%

32.4%

Stores

2,665

14.4%

49.5%

Space (m sq ft)

66.9m sq ft

9.7%

64.6%

Source: Tesco, IGD Research
* Sales excluding VAT and impact of IFRIC 13 (customer loyalty schemes)

Tesco’s new ambition to be outstanding internationally has several dimensions to it.

  • Faster space growth: 8.4m sq ft of gross new space is planned for 2011/12, (up from 6.5m sq ft in 2010/11)
  • Best practice transfer: Tesco is seeking to achieve this across areas such as systems, ranges and formats, with a focus on global sourcing and online launches
  • Multi-format development: There will be increased drive to supplement hypermarket estates with less capital intensive smaller store formats
  • Active property portfolio management. Tesco is keen to reinvest property profits, for instance in the redevelopment of shopping malls in Asia and Europe
  • Focus on strengthening existing operations. Tesco’s short term focus will be on building existing operations, though it will continue to monitor wider opportunities

Fresh & Easy moves towards profitability

Fresh & Easy, one of Tesco's highest profile international operations

One of Tesco’s highest profile international operation is Fresh & Easy, its US start-up which now operates 164 stores in the western United States. Having invested substantial resources into launching and building the business, Tesco is eager to realise a return on its investment. In 2010/11, Fresh & Easy’s like-for-like sales grew robustly as the format grew in popularity, but losses increased, reflecting the purchase of two fresh food suppliers.

With these businesses now integrated into Fresh & Easy, losses should be substantially lower in the current financial year, and with operating overheads reduced, Tesco believes it can break even with only 300 stores instead of the 400 previously anticipated. With the format receiving positive feedback from customers and 50 further stores set to open this year, Tesco is confident of reaching breakeven before the end of 2012/13.

Expansion in Asia

Over half of Tesco’s international revenues are generated in Asia, with the retailer’s presence concentrated in the most dynamic South and East Asian economies.

Tesco’s most significant operation is in South Korea where it now achieves annual turnover of £5.0bn through a combination of formats. Within the next year, Tesco plans a substantial non-food online launch, its first outside the UK, which will build on the proven success of its online groceries service and extend the reach of the comprehensive non-food offer of its hypermarkets.

Asia offers opportunity for further market entries should Tesco want to broaden its presence longer term

China is one of Tesco’s most exciting prospects. Tesco already operates over 100 stores in the country, and generates over £1bn per year. Space growth is a key priority for Tesco with 2m sq ft of space targeted in 2011 to add to the 8m sq ft it already operates. Many of the new stores will anchor mall developments, giving Tesco greater control over property expenditure and an additional revenue stream from tenants in the development. While Tesco’s store rollout has been less speedy than planned (due largely to delays in securing permissions for new store openings), but Tesco is confident about its ability to grow scale.

India is Tesco’s newest market where it is committed to rolling out cash and carry outlets, working in partnership with Tata Group’s retail arm, Trent. It also has a franchise agreement with Trent to help support the growth of its Star Bazaar hypermarket operation. Though development options in India are limited by government regulations prohibiting the operation of foreign-owned multi-brand retailers, the launch will provide Tesco with valuable insight into the Indian grocery market and provides a platform for retail development in the event of restrictions being lifted.

While Tesco is committed to building sales in existing markets in the short term, Asia offers opportunity for further market entries should Tesco want to broaden its presence longer term. Indonesia for instance, now recognised as a globally important market through its membership of the G20 group of leading economies, offers much potential. Vietnam is another highly dynamic market; a country keen to replicate the economic transformation of its northern neighbour, China.

One market where prospects are distinctly more challenging is Japan, where Tesco operates over 140 convenience stores. Though Tesco has made good progress in refining its Express stores into a profitable format, the outlook for the Japanese economy remains difficult, particularly following the 2011 tsunami.

Further opportunities in Europe

While economic growth in Europe has been sluggish in comparison to Asia, the continent still holds many opportunities for Tesco to build on existing operations.

Tesco’s most significant European market is Ireland, where it is the market leader. While the Irish economy has been hard hit by austerity measures in the wake of the EU economic bailout, Tesco continues to grow sales by emphasising its value credentials and expanding its range of Irish-produced products. It also has the opportunity to build online sales, which are currently much lower as a share of total sales than in the UK.

Perhaps Tesco’s greatest opportunity for long term growth in Europe lies in Turkey, where it has been steadily increasing its estate of Kipa hypermarkets

Central Europe is the main focus of Tesco’s international activity and Poland, its largest market in the region. Having built up a nationwide network of hypermarkets, Tesco is now focusing more on opening up new catchments in the country with smaller formats. Having introduced Clubcard in 2009, Tesco is now preparing for a dotcom launch in Warsaw in early 2012.

A dotcom launch is also in the offing in the Czech Republic with the service set to debut in Prague in the next few months. As in Poland, Tesco is actively pursuing a multi-format strategy; its presence in the convenience market was greatly strengthened in January 2011 when it announced the acquisition of 128 Zabka and Koruna outlets.

Perhaps Tesco’s greatest opportunity for long term growth in Europe lies in Turkey, where it has been steadily increasing its estate of Kipa hypermarkets. A large population and economic liberalisation makes Turkey a market with considerable potential. Having invested in modern distribution centres, Tesco has a solid foundation for expansion in the country and plans to increase its space by almost a quarter in 2011/12 alone.

Tesco's global store numbers

Tesco map

Source: IGD Research
*Sales excluding VAT and impact of IFRIC 13 (customer loyalty schemes)

 

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