Without trying to ensure the Grocery Insight blog becomes somewhat of a tragic obsession of writing solely about Dave Lewis and Tesco, they are extremely newsworthy at the minute, and part of the wider Grocery Insight service offering is all about monitoring the market, spotting trends and activity in the shops. There’s plenty to look and consider with the Tesco empire. The 12 days of Christmas Dave Lewis are all about tracking the 12 days before the announcement to the City on the 8th January which will highlight where the business goes next. This, as ever is all guesswork on my part as nothing has been given away to the City, journalists or otherwise.
If you will, it’s a list of priorities that I’d be looking at targeting ahead of a major announcement to the stock market. They all interlock as, well, they’re all linked to the business but some are intrinsically linked. Clubcard for example directly cycles back to price (investment in Clubcard could be ploughed into lower prices) alongside other elements (Dunnhumby?) Tesco invested heavily in Christmas (part of the latest profit warning) and the 49p ‘Festive Five’ was popular and took the fight back to the discounters.
Today, we consider space in the overseas businesses, with the debt standing at c.£7bn, the overseas empire may be sold or spun off in order to pay down debt and fund a real fightback in the UK.
Its one of my rules that I don’t really speak about stores I’ve not visited – I may make reference to Carrefour et al, but having never visited their stores. It is difficult to have a solid point of reference, so there’ll no images in this whistle stop tour of the Tesco world.
Philip Clarke was international director amongst other roles in Tesco, and oversaw the infiltration into areas like the United States. However they also backed out of markets on his watch; with the US and Japanese businesses disposed of, and the China business was split into a JV with Tesco retaining 20%. These were expensive, China cost £520m in goodwill write downs, the US adventure cost billions of pounds too.
India is a small part of the overseas empire, with a joint venture being undertaken to try access a growing market, without taking over the world as they have done previously.
Tesco themselves earlier in 2014 highlighted the overseas empire in 3 distinct categories;
Korea, Malaysia and Thailand – Significant future potential.
Ireland, Czech Rep, Hungary, Poland and Slovakia – Improve and hold.
Turkey, India, China – Refocus on a more profitable approach to growth.
As ever, any business is only worth what people are prepared to pay for it. It is likely Dave Lewis will look at the overseas empire to fund further activity in the UK and to deal with the debt that looms large over the business. Not a problem ordinarily, but with the credit rating looking precarious given the profit warning and accounting issues…. Tesco needs to reduce debt.
UK –
We have covered the UK already of course, but one format that wasn’t considered was HomePlus, which is the format trading in clothing and non-food. Had a place for a time in Tesco, but with a small number of stores trading. It looks likely that this operation could well be discontinued.
Republic of Ireland –
Tesco Ireland is regularly hammered on Kantar and the discounters have had so much success in the Irish Republic, their supermarket industry is arguably more competitive than ours with no clear leader. Where Tesco in the UK are clear market leaders, the Republic have Supervalu, Tesco and Dunnes all within percentage points of each other.
The discounters have a large market share (16% from a base of 5% in 2008), so they are very strong too. This leads to Tesco Ireland struggling under the wider UK leadership which also struggles on price competitiveness versus the discounters.
An exit is unlikely here, as the business is phenomenally successful and leads the market but there needs to be a radical re-think about how the business operates versus the discounters who do a great job on locally sourced products. I’ll be across the water later in the month for a look at food retail in Ireland, and I’ll be keen to see Tesco and how it operates.
Verdict – Remain under Tesco control, with a benefit to come from the greater focus on the UK.
Turkey
Similar to the UK in a sense of the overspacing, but 9 stores were closed in an effort to stabilise the losses. All overseas businesses now have online shopping, with Turkey starting their operation in February 2014. Like for Like sales have stabilised in the region after a turbulent 2014.
Tesco talk of Turkey remaining a ‘focus’ and it is interesting to see what happens longer term with Turkey as like for like sales continue to struggle. With the business struggling, it won’t be worth as much as a business that was blazing a trail. Tesco spoke of having discussion with potential local partners too, so it could well change hands.
Verdict – Recovery may take some time, so it could be a business that could be sold, or end up being a JV (joint venture) with a local operator.
Eastern Europe – Poland, Hungary, Czech Republic and Slovakia
Some strong competitors out in the Central / Eastern Europe area and Tesco have struggled here, these countries all fall into the improve and hold position as set out by Philip Clarke. It may be that Dave Lewis looks to divest these businesses but their value won’t be significant. The trading position has been difficult with sales on a relatively downwards trend for a while now, with some small improvement towards the back end of the year.
Regulatory constraints alongside emergency tax (Hungary) mean trading continues to be tough, the recession has been particularly felt here and the discounters have done well.
There has been some decent work from Tesco, focussing on price, smaller stores and enhancing clothing which has been relatively successful. However some stores are large but there has been real action here to redress the balance, Hungary saw an example of successful space reallocation with sales uplift of 2.5% in one store with H&M / Sports Direct taking space.
Verdict – Picture is improving but there are many hard yards ahead. Returns are likely to be diminishing, could Dave Lewis look to divest the businesses? Any price paid wouldn’t be excessive given the tough trading conditions.
Korea, Malaysia and Thailand
The jewels in the crown? Identified by Tesco as having significant future potential given the growth of the region and that refreshed stores are performing well, Korea saw their refreshes perform well according to Tesco, and an appetite for smaller stores (called 365 plus) fuels a plan to open more than 200 in the year.
Thailand also has significant potential with larger stores performing well, with Home Shopping to launch too alongside more convenience stores. Big growth potential here for Tesco and they’re experienced in operating small formats as well as larger stores.
The combined Asia businesses made just shy of £700m in the last financial year (£683m) so represent a good, solid, well run business, in line with some UK operator profits. Whilst sales haven’t been all positive; regulatory impact has affected things in Korea, alongside weaker sales in Thailand, but there is significant potential given the preference for smaller stores, and Tesco experience.
Verdict – This is where Dave Lewis will look to generate cash to aid the recovery. Three businesses that have significant upside and currently perform well. There are strong retailers in the far East, alongside wealthy individuals who may look to acquire businesses if they became available.
So there we have it, a whistle stop tour of the overseas operations. Now the businesses that were diminishing / loss making (China, US, Japan) are disposed of. Lewis has a free reign to look at things afresh overseas.
Carrefour appear to be the benchmark for watchers of Tesco. There are similarities sure, a number of businesses overseas have been exited and their France heartland performance has improved significantly. Dave Lewis will be hoping his plans for Tesco bear the same fruit.
Divesting stakes, or indeed the entire business to a buyer may have an element of selling off the family silver. But it’s clear that there remains significant value in the Far Eastern operation, and Dave Lewis needs cash to pay down the debts and resolve the pension deficit.
That is before the recovery in the UK begins, price remains an issue and with Asda dropping prices on staples like Milk, Sugar and Eggs at the start of January, it will get harder before it gets easier and getting close Asda will cost serious money.
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Grocery Insight provide market insight on the UK sector with a focus on individual retailers such as Tesco. This insight is useful to various stakeholders and due to my store based focus. Insight can be delivered to suppliers to focus on growth opportunities, analysts and investors to assess the business performance and long term outlook and retailers themselves to assess best practice.