Huffpost UK uk

Tesco Suffers Overseas And UK Business Isn't Out Of The Woods Yet

Posted: Updated:
Print Article
TESCO
Tesco issued its largest profit drop in 20 years | PA

Supermarket giant Tesco has reported a fall in group profits with a 12% decline in group pre-tax profits to £1.7 billion in the six months to 25 August - its first profits fall for nearly 20 years.

Pro-Tesco commentators pointed to the retailer's much lauded £1bn turnaround plan, saying that in the UK the impact was starting to take effect with like-for-like sales growing 0.1% in the final three months of the period (excluding excluding VAT and petrol), compared with a decline of 1.5% in the first quarter.

But as UK sales improved, like-for-like sales in Asia and Europe fell into the red in the second quarter - caused in part by shopping hour restrictions hit trade in South Korea and the eurozone crisis impacted its performance on the continent.

Shore Capital retail analyst Clive Black told Huffington Post UK that Tesco was being forced to contend with a number of pressure points all at the same time.

"Tesco UK's profits fell as a result of the margin investment in staff, wastage and vouchering," he said. "The out-turn from the business was broadly in-line with our expectations apart from Europe, which was £40 million below forecast.

"The fall-back in international profits was largely outside Tesco's control; shopping hour restrictions in Korea, tax rises in the Czech Republic and the contraction of economic activity across the European region, (but) this was not the case in the USA, where the poor performance is self-inflicted."

Mintel's retail director Richard Perks broadly agreed, adding that the opening hours legislation in Korea was predicted to hit profits by £100m this year.

"But I think the biggest problems are in the UK and they seem to have turned the corner there," he concluded.

Lauren Charnley, stockbroker for Redmayne Bentley, agreed Tesco's main driver for its struggles was the UK market and the fact the business hadn't taken off in the US.

"Korean regulations surrounding opening hours have impacted Tesco’s performance but in the statement the group referred more to the domestic challenges rather than those overseas," she told Huff Post UK.

“2012 has been a terrible year for Tesco with today’s results adding further troubles as the group announced a drop in profits for the six months to 25 August.

“The retail sector has been hit particularly hard as a result of the double dip recession, with mid-range supermarkets struggling as consumers ditch brand loyalty in favour of a bargain.”

Investec Securities was advising its investors to sell shares in Tesco on Tuesday, saying its biggest concern is the structural issues it sees in the UK market.

"We believe traditional stores are in decline, yet Tesco and the industry continue to add significant capacity," said analyst David McCarthy.

"Simultaneously, the company is dealing with significant management upheaval (the chairman retired last year and five out of eight executive board members have left within 18 months or so, leaving just three), and the industry overall appears to be in structural decline, as trade transfers from highly profitable large stores to less profitable channels, such as the internet and convenience stores.

McCarthy continued: "To make matters worse, the competition is stronger collectively than it has been in a generation... And just when it could not get worse, Tesco’s international operations are suffering.

'Perhaps it is time for Tesco to undergo a major overhaul of strategy. Maybe it is time to do better things rather than just doing things better?"

Around the Web

Tesco: what the analysts say

It's good news that Tesco profits are falling

Tesco reports improving UK sales

Filed by Charlie Thomas