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article imageTesco pins UK turnaround on price cuts and store revamps

    Feb 25, 2014 in Business

By James Davey and Neil Maidment

LONDON (Reuters) - Britain's Tesco <TSCO.L>, the world's third-largest retailer, is to focus on cheaper pricing as it relaxes its view on operating margins and steps up its store revamp program and investment in online and convenience channels.

Outlining his plans at an investor and analyst seminar on Tuesday, Chief Executive Philip Clarke said the measures accelerate a turnaround plan aimed at countering increased competition in the British retail market, but which has so far failed to boost its languishing sales.

"This doesn't signal a need for a new strategy, simply to go faster," Clarke said.

He did not explicitly abandon the company's target for a UK operating margin target of a market-leading 5.2 percent, but he did say that "the margin will be what the margin will be", while Chief Financial Officer Laurie McIlwee declared that "cash, not percentage margin, will define our success".

While not signaling a return to the "pile 'em high, sell 'em cheap" mantra of Tesco founder Joseph Cohen, the apparent abandonment of the target effectively says that Tesco will make less profit from its revenue as it chases higher sales volumes with lower prices.

In common with Britain's three other leading grocers - Wal-Mart's Asda <WMT.N>, Sainsbury's <SBRY.L> and Morrisons <MRW.L> - Tesco is being squeezed between the hard discounters Aldi <ALDIEI.UL> and Lidl <LIDUK.UL> and upmarket grocers Waitrose <JLPC.UL> and Marks & Spencer <MKS.L>, losing market share.

A commitment to reduce promotions and invest an additional 200 million pounds on UK price cuts will be seen as a direct response to the rise of the discounters as well as moves by its biggest rivals. Asda, for example, has pledged to spend more than 1 billion pounds ($1.67 billion) on price cuts over the next five years.


Tesco is 22 months into the turnaround program for its 3,150 British stores, having already spent more than 1 billion pounds ($1.7 billion) on refits, more staff and new product ranges, yet sales at stores open for more than a year, excluding fuel and VAT sales tax, fell 2.4 percent in the six weeks to January 4 and, according to monthly industry data, have continued to fall since.

Shares in Tesco, down 10 percent over the past year, were little changed by the close, finishing up 0.5 pence at 335.1 pence, valuing the business at about 26.9 billion pounds.

"They need to be bolder and braver," Bernstein analyst Bruno Monteyne said. "They will try to dominate the middle with better prices and better quality, but they won't be big enough changes to shift the needle."

The overall approach to growth and returns set out last year remains the same, Clarke said, targeting mid-single-digit annual growth in trading profit, return on capital employed (ROCE) within a range of 12-15 percent and dividend growth broadly in line with underlying earnings, with a target cover of more than two times.

Tesco, which makes about two thirds of its revenue in Britain, has suffered more than many rivals because it has more large stores and traditionally sold a higher proportion of large-ticket non-food items, such as domestic appliances, where shoppers cut back most in an economic downturn.

To address that, Clarke has refocused the company's non-food offer on higher-margin categories, such as clothing and homewares, though only about a third of its huge Extra stores have been refurbished so far. Tesco said the Extra format will be a priority for 2014, with 110 slated for refits.


Clarke also plans to open 150 convenience stores a year, while other initiatives include a planned doubling of click-and-collect locations and the expansion of a scheme allowing loyalty card holders to save on fuel.

The group, which trails France's Carrefour <CARR.PA> and U.S. giant Wal-Mart <WMT.N> in annual sales, also said it would reduce net new space significantly, resulting in lower overall capital expenditure.

Having given guidance for net new UK space of about 1.4 million square feet for 2013/14, it plans a further reduction to 0.7 million sq ft in 2014/15.

Group capital expenditure will drop to no more than 2.5 billion pounds a year, its lowest level for 10 years, for at least the next three financial years. Tesco had previously indicated a figure of 3.2 billion pounds for 2013/14.

Clarke reiterated that the pursuit of disciplined international growth remained a priority. On Monday Tesco said it was in talks about a possible restructuring of its business in Turkey.

"Overall this is the 'middle way' message we expected ... nothing that should cause panic across the industry," Deutsche Bank analyst James Collins said. ($1 = 0.5994 British pounds)

(Additional reporting by Emma Thomasson; Editing by David Goodman)

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