Tesco group chief execuitve Philip Clarke gives more detail on the US exit, UK property pipeline and overseas businesses.
Today we have published our full year results and we have updated our balance sheet to reflect the changing value of our US business, our UK property pipeline and our businesses in Poland, the Czech Republic, and Turkey.
First, the US business, Fresh & Easy. We entered the US in 2007. At the time, the three states we were in – California, Arizona and Nevada – were the fastest growing in the US. Two years later, they were the worst performing, having been hit hard by the subprime mortgage crisis.
We invested a billion pounds of capital in Fresh & Easy to build stores and a distribution centre. For a combination of reasons we couldn’t make the business profitable quickly enough. Faced with a choice of investing further or selling up, we have chosen to sell up and to focus future investment in areas where we can deliver greater returns.
Although the sale process is well-advanced, it is not finished. Until it is we have written down the value of the assets and included provision for leases which we cannot break. We should recover some of the capital when we agree a sale of the assets but for now we are writing it all down.
Second, the UK property pipeline. For many years, we bought land and developed it to build stores, mainly big stores. It served us very well for many years and was part of our success in the 90s. A year ago I said we weren’t going to do as much of that anymore.
The large stores we have are great and we are doing a lot of work to make them more vibrant and relevant for today’s customers, but we won’t need many more of them because growth in future will be multichannel – a combination of big stores, local convenience stores and online.
It takes a long time to develop stores, particularly large stores. Much of this property was bought more than five years ago, some more than 10 years ago. That is before the 2008 financial crisis, before the iPhone, social media, tablet computers, before we knew how profoundly technology would change both how we and our customers live and shop. Technology has changed much that we all took for granted and it is still changing.
The last five years have shown that change in retail can be disruptive and come in sharp steps, not a steady trend. We must anticipate change and act decisively so we looked hard at the land we own and conclude that although we have a strong and attractive network of stores, we will never develop some of this land, mostly the very large mixed-use developments. We bought in a boom, but times have changed and we won’t make back what we paid for it, we won’t pretend we will, so we have written down the value.
These first two were the logical consequence of difficult decisions we have made in the last year. The third write down, the goodwill impairment, is a consequence of a rapidly slowing Eurozone economy. When we acquired businesses in Poland, the Czech Republic and Turkey, as well as the shops and other assets we bought goodwill.
Goodwill is an intangible asset. It isn’t property or something you can see, it is the value of the business over and above the value of the tangible assets acquired and is based in part on the projected growth for the business. When we bought those businesses, those three markets were some of the fastest growing in Europe. Today, their growth is much slower or it is declining. Consequently growth of those businesses is slower than projected, so the goodwill must be written down to reflect that.
When you write down an asset, the difference between the stated value and new value is taken from profit. The write-downs are subtracted from our trading profit, which is the profit we make from selling products to customers. Our trading profit – the cash through the tills – was nearly £3.5billion last year, in spite of reinvesting in the UK business and difficult trading in Europe and Korea.
Big decisions come at a cost, but that won’t deter us from taking them, because they are the right decisions for our long term success.
Leaving the US is the right thing to do. Stopping building lots of big new stores is the right thing to do. Building an international business, even when global economic headwinds work against us, is the right thing to do because it has delivered a billion pounds of profit this year alone.
We have taken big decisions and these are the consequences, but having taken them our business is in better shape and better able to deliver sustainable, long-term growth.
- Taken from Tesco’s Talking Shop.
Tesco profits down 13% and sales up 1.3% as it confirms US exit
- Currently reading
Blog: Tesco boss Philip Clarke explains the grocer's full-year profit fall