Tesco’s turnaround gathered further momentum today as it unveiled a spike in operating profit. Here are seven things we learned from its full-year results.
1. There will be no more overseas disposals
Amid Tesco’s proposed £3.7bn takeover of Booker, a number of analysts had suggested that the grocer could offload more of its international businesses in order to increase focus on the UK.
Tesco has already sold its Korean Homeplus business and its Turkish Kipa stores, however, boss Dave Lewis insisted this morning that there would be no further disposals.
He said: “We talked about the fact that our international review was over – and it is.
“There are teams that are in place who are pursuing plans that all create value for Tesco shareholders. We just have to concentrate on delivering them.
“We are not looking at more disposals. In the retail operations that we’ve got, we have plans to improve them.
“The challenges we face in Poland require us to adjust that plan and I was there last week with the new management team looking at exactly those plans.
“I hear the speculation, but the key word is that it’s speculation.”
2. Tesco is repurposing store space at a pace
Tesco has hit the accelerator on plans to repurpose excess space in some of its larger stores.
The grocer has adapted one million sq ft of trading space across its estate during the financial year, largely through concession partnerships with the likes of Holland & Barrett and Arcadia in the UK and H&M, TK Maxx and Decathlon in Europe.
Despite hitting that milestone, Lewis said there is more work to be done.
He said: “The Arcadia and Holland & Barrett partnerships are extending now. For all of our partners, they have been successful.
“We said two years ago that we were keen to partner in this way and I am pleased with the way that’s developing so we are looking for opportunities where they can be rolled out.”
Asked whether new retail partners could be brought on board in its current financial year, Lewis said: “You will see some new things from us, but as always I’ll let you see those things from us as we roll them out.”
3. Property acquisitions will continue
Remaining on the property theme, Tesco is continuing its drive to acquire more of its stores in order to reduce its exposure to rent increases.
The grocer purchased the freehold on 16 of its stores in the year to February 25, representing an annual rent saving of £22m.
And Tesco revealed today that it has just completed the purchase of seven more stores, which had been built as a joint venture with British Land. That deal will save it a further £14m a year in rent.
Tesco now owns 51% of its property by value in the UK and Ireland, up from 47% the prior year.
At a group level, it owns 57% compared to 54% in 2015/16.
Lewis did not put a target on what proportion of property Tesco wanted to own, but said it would continue to snap up freeholds on “great stores that were economically sensible to buy back.”
4. Farms brands are flying
Tesco took aim at the discounters when it launched its seven entry-level Farms brands last year, following a £300m investment.
The presence of names like Boswell Farms and Woodside Farms in the fruit, vegetable and meat aisles caused controversy, with the National Farmers’ Union lodging a complaint to trading standards claiming they made products sourced from overseas sound British.
But the uproar has not impacted sales, with Tesco revealing today that the Farms ranges now feature in 64% of customers’ baskets.
Tesco chief product officer Jason Tarry told Retail Week he was pleased with the performance of the range and said Tesco was now undertaking other category reviews following the success of Farms.
“We’ve got a framework that we’re working to now, which is effectively ‘good, better and best’ and the ‘good’ position will be to bring in more brands exclusive to Tesco,” Tarry said.
“That won’t necessarily be Farms brands, because that won’t be relevant in some categories, but we are working through that category review programme.”
5. Online is improving, but remains challenging
While its own brand Farms proposition is soaring, the same cannot be said of Tesco’s two ecommerce platforms.
The retailer insisted today that its online model is “sustainable”, pointing to a 0.6% increase in orders and a 2.1% jump in basket size year-on-year.
But it flagged that both its online grocery business and its Tesco Direct website for general merchandise were achieving margins below the 2.3% achieved by the group in 2016/17.
Lewis said both businesses were “more commercially viable this year than they were the year before” but said Tesco Direct was “more challenging”.
Tesco reduced its losses from Tesco Direct by £30m in 2016/17, but Lewis said it was “still not where we would want it to be”.
Lewis said he was “quite happy” with its online grocery performance, but when asked by Retail Week whether the home delivery arm was profitable, the Tesco boss responded that it was “heavily sensitive information”.
6. Suppliers enjoy working with Tesco again
It would have been hard to imagine two years ago when Tesco was at its lowest ebb, but today the supermarket giant was able to blow its own trumpet about its rapport with suppliers.
Those relationships took a battering in the final months of Philip Clarke’s reign, leaving Lewis and Tarry an uphill task to recover them.
But recover them they have – and the numbers Tesco paraded today emphasised that point.
Its Supplier Viewpoint measure – which assesses whether supply partners feel they are treated fairly – improved from 70% to 77% at a group level in 2016/17.
The improvement was even more pronounced in the UK, where the score climbed from 68% to 78%. In 2015, that stood at just 50%.
Tarry, the man in charge of Tesco supplier relations, told Retail Week that transformation had been “hugely important” to its wider turnaround, but admitted the speed at which it happened was a surprise.
He said: “In the same way that Dave would say our recent performance is ahead of expectations, I would have to say the same thing about supplier feedback.”
7. Cost savings are on track
Last October, Tesco revealed plans to reduce operating costs by £1.5bn by 2019/20 as part of its ambition to achieve a group margin target of between 3.5% and 4%.
The supermarket giant has got off to a solid start, establishing £226m of savings between October and the end of February.
Today Tesco broke those savings down into three key areas, with the bulk of them – some £131m – garnered by reshuffling its store operating model in 1,500 stores.
Those changes have involved moving replenishment from nights to days and stripping out assistant manager roles in c-stores.
Tesco saved a further £63m by reining in purchases of goods not for resale, such as cleaning products, paper and printer ink, while £32m was saved by tightening up its logistics and distribution.
The simplification of the distribution network included the closing of two warehouses in Welham Green and Chesterfield.