While all eyes are on Tesco’s UK business, today’s interim results show that the grocer’s domestic market is not its only problem.
While all eyes are on Tesco’s UK business after chief executive Philip Clarke pledged to plough in £1bn to revive flagging growth earlier this year, today’s interim results show that the grocer’s domestic market is not its only problem. The performance of its international markets is disappointing and while some of the problems are completely out of Tesco’s control, it still leads to a bigger headache for the grocer, which is fighting tooth and nail in its domestic market to return to form.
Tesco’s international business has been impacted by both economic and regulatory pressures. Its Asian and European arms – both powerhouses when Clarke headed up international in Sir Terry Leahy’s rein – have suffered. Asia’s trading profit fell 3.8% to £281m while European trading profit fell 27.8% to £171m.
In South Korea – Tesco’s second biggest market – the grocer has been hit by regulatory changes to shopping hours. From July Tesco – along with other large retailers – has had to close for two Sundays a month and trading hours on all other days restricted. Sunday is the peak trading day in Korea, accounting for more than 20% of weekly trade.
The result for Tesco is an expected £100m impact on profit performance for the year. Tesco’s mammoth business can obviously easily absorb this impact but it comes at a particularly difficult time. When Clarke took over the top job South Korea was going great guns and its management team in the market were on fire – it was a market he didn’t need to worry about. And while the regulatory changes are beyond its control, it is at the very least a nasty thorn in Clarke’s side.
In Europe, Tesco blames the continued crisis in the Eurozone and subsequent austerity measures for its fall in profits. Czech Republic, for example, faced an increase of 4% in the lower of its two VAT rates earlier in the year, which Tesco said led to significantly reduced consumer confidence and demand.
The European fall is disappointing and with the economic situation remaining unstable Tesco needs to make its business work harder to ride out the problems. The grocer highlighted that general merchandise and electrical sales have been particularly affected in the region but that clothing performance is robust. Any further investment in the region needs to focus on growth areas to keep the grocer’s position.
Tesco’s US business reported a small reduction in trading loss to £74m, worse than some City expectations. The US has only ever been a story of losses despite the like-for-like growth but the grocer is taking the right steps by driving profitability in existing stores and reducing its opening programme. Tesco said new capital investment will be constrained so it seems Clarke is giving existing stores the chance to prove themselves before ploughing in further money. Even if he decides to pull the plug on the US, he can’t be accused of not giving it his all.
Many brokers believe Tesco’s UK business has bottomed out but the problems internationally will give cause for concern. Clarke’s fresh management team has incredible pedigree but there isn’t any part of Tesco’s business that doesn’t need a close eye at the moment.
Tesco profits fall 11.6% despite Q2 sales growth
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Comment: The UK is not Tesco's only problem