Fresh from being shown around its Asian operations, brokers agree that international is Tesco’s most significant growth opportunity.

Fresh from being shown around its Asian operations, brokers agree that international is Tesco’s most significant growth opportunity. International accounted for 31% of sales and 22% of group operating profit in the last financial year, yet Bernstein believes these stats underestimate the importance of the overseas business to Tesco’s future. The broker said South Korea and China highlight the sustained growth potential of Tesco’s international business.

It’s easy to be wowed by the Asian markets. In Korea, already Tesco’s second biggest market outside of the UK, the grocer is fast catching up with the market leader. In China, the mass urbanisation of the country could deliver untold riches, with most international retailers - including Sainsbury’s - eyeing the market.

But the real reason most brokers are backing international is the returns. A common criticism has been that high capital expenditure drives sales growth but returns don’t improve. Some were not convinced by Tesco’s assertions that investing in developing markets produced slow returns to start off, but improve as it builds scale. However, Tesco revealed returns are 30% higher in markets where it is market leader and 30% higher again in those markets where its operation is mature. One of the reasons Tesco can achieve such improving returns is via its centralised model, bringing the benefit of scale. Other international players building businesses may prove more profitable in the short term but with fewer scale benefits.

JP Morgan believes Tesco’s international scale is becoming evident, estimating its international business could create incremental revenues of £16bn (ie doubling) in the next five years. Struggling US operation aside, it is hard not to see why Tesco is going for growth internationally. The UK will only deliver muted growth, and getting a foot in emerging markets early will stand it in good stead for years to come. We’ll no doubt see Sainsbury’s following in its footsteps in the not too distant future.