UK

Tesco Pulls Out Of US After Profits Halved

17/04/2013 07:58 BST | Updated 17/04/2013 16:44 BST

Supermarket giant Tesco revealed a £1.2 billion hit from its failed foray in America as annual profits more than halved after a difficult year.

The group confirmed plans to pull its Fresh & Easy business in the US and reported its first fall in full-year group profits for two decades, down 52% to £1.96 billion after a series of hefty property writedowns and slowing sales growth.

Tesco insisted its UK turnaround plans were on track as it said it saw its best like-for-like sales growth for three years in its final quarter, although the 0.5% rise marked a slowdown on the 1.8% surge seen during Christmas trading.

The decision marks the end of the supermarket "space race" as it scraps more than 100 major store developments and admitted future growth would be focused more online.

The UK's biggest supermarket said the days of snapping up land and building major stores that led to its success in the 1990s were now behind it as customers increasingly shop over the internet.

It announced the move as it reported its first annual profits fall in nearly 20 years, down 51.5% to £1.96 billion, hit by slowing sales growth and a raft of hefty writedowns, including £804 million from the decision to pull its major UK store pipeline.

Tesco also revealed a £1.2 billion hit from its failed foray in America, confirming plans to offload its Fresh & Easy business in the US were "well advanced" with interest from buyers for all or parts of the business.

The US exit has left it nursing a £1.2 billion impact to its bottom line, with post-tax profits plummeting by 95.7% to £120 million. On an underlying basis, pre-tax profits fell 14.5% to £3.5 billion.

Panmure Gordon retail expert Philip Dorgan said Tesco's store development u-turn was a "welcome shift in strategy".

"The space race is over. The digital race is on," he added.

Tesco's plans will largely see big Tesco Extra developments pulled, although the group did not reveal which sites would be affected.

Philip Clarke, chief executive at Tesco, said: "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."

He said the financial impact of the group's decision was as a result of land being bought at the height of the property boom more than five or 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," he added.

The group reduced store expansion by 40% in the year to the end of February, but opened 120 Tesco Express and 26 One Stop outlets and said it plans to continue focusing new space on convenience stores over the year ahead.

It comes as a marked change in direction from a decade ago, when supermarkets were accused of land grabbing and racing to increase their footprint with ever larger stores - a trend that coined the phrase Tesco Town.

Internet shopping has since had a significant impact on the grocery sector, with many customers shunning stores to shop in the comfort of their own homes.

Tesco said online sales reached the £3 billion milestone after rising 13% in the year to February 23.

In an effort to keep customers coming to its stores, Mr Clarke is taking steps to improve the shopping trip through brand relaunches, store makeovers and hiring more staff.

Tesco also last month bought the 47-store Giraffe child-friendly restaurant chain for £48.6 million under plans to open the eateries alongside larger stores and transform them into family-friendly retail destinations.

The deal follows recent similar investments in the Harris + Hoole coffee shop chain and Euphorium Bakery.

Mr Clarke insisted his UK turnaround plans were on track as Tesco saw its best like-for-like sales growth for three years in its final quarter, although the 0.5% rise marked a slowdown on the 1.8% surge seen during Christmas trading.

He admitted sales over the past few months had been impacted by the horse meat scandal as customers steered clear of frozen meat products.

Tesco had to withdraw four products from sale amid the crisis, but said the effect on overall sales was minimal and stressed that trading was now "back to normal".

The group's financial arm, Tesco Bank, also became the latest player to increase its bill for compensation claims relating to mis-selling of payment protection insurance (PPI), up from £30 million in the half-year to £115 million.

Its shares fell 3% and Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said investors were "not entirely convinced" by the group's turnaround plans.

He added that it will be a "slow process before the company can hope to recapture its former glories".

Tesco has been in recovery mode since falling market share and intense competition prompted the chain's first profits warning in 20 years in January 2012. That forced Mr Clarke, who started his career stacking shelves in Tesco, to unveil a £1 billion overhaul plan in April last year.

A year on from launching the fightback, Mr Clarke said he was pleased with the progress in the UK, although trading profits in the domestic business fell 8.3% to £2.3 billion in the year to February 23.

UK like-for-like sales fell 0.4% excluding VAT and fuel over the year, despite buoyant Christmas trading as a 5% fall in general merchandise sales weighed on its performance.

Difficult trading in Korea and the eurozone also left international profits lower, down 10.3% in Asia and 37.8% in Europe.

The group wrote down the value of its businesses in Poland, the Czech Republic and Turkey by £495 million.