Tesco - the UKs largest retailer

14 February, 2013

The retail landscape has rarely been as turbulent as it is now, and

with further economic uncertainty predicted understanding what
is happening with the big retailers has never been more
important.
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COMPANY SNAPSHOT

TESCO
The UKs largest retailer*, Tesco employs more than 200,000 fulltime staff and has nearly
3,000 stores, 1,427 of which are Express convenience shops. The grocery retailer also sells
books, clothing, electronics, furniture, petrol and software and offers a range of financial
services, telecoms and internet services.

Tescos first decline in group profits since 1994 was due to a 1bn
investment in its UK turnaround plan

At the helm is Philip Clarke, who replaced Sir Terry Leahy as group chief executive in 2011.
Following this, retail director Andrew Higginson, who missed out on the post to Clarke, left to
become chairman at Poundland in
July last year. In March, Richard Brasher, chief executive of the UK and Ireland, also
announced he would be leaving in the summer, with Clarke taking over the role temporarily.
In Numbers

UK sales

42.8bn
UK operating profit

2.48bn
UK stores

2,948
UK employees

205,852 (FTE)
Tesco generated annual sales in 2011/12 of 65.17bn, up 6.5%, for the financial year to
February 2012. Of this figure, 42.8bn was generated in the UK, a rise of 5% year on year,
while UK online sales rose 10% over this period.
However, UK operating profit declined by 1% to 2.48bn, dragging the UK trading margin to
below 5.8%, which was the first time it had been below 6% since 2005. Profits were
particularly weakened in the second half of the year, due to reduced inflation resulting from
low-price promotion Big Price Drop and weak Christmas sales, which were affected by the
substantial increase in competitor couponing activity.

Tesco announced its first decline in group profits since 1994, as pre-tax profits for the 26
weeks to August 25 fell 11.6% year on year. Yet, the retailer halted 18 months of consecutive
like-for-like sales decline in the second quarter, up 0.1% following a 1.5% fall in the first
quarter.
Clarke said the profit decline was due to the 1bn investment in the retailers UK turnaround
plan, covering key aspects of service, range, quality, price, availability and store
environment, such as expanding its click-and-collect service and improving its digital offer.
The scheme has invested 200m to bring an additional 8,000 staff into stores and to
modernise 230 stores, including improving its meat, bakery and fresh produce departments.

Strengths

UK market leader and global scale Tesco is the UKs biggest retailer,
dominating both the food and non-food markets. Some 12% of all retail spending goes
through its tills (about 30% of all food sales), which gives it huge advertising reach with
customers, leverage with suppliers and access to talent.
Overseas strength Under the leadership of Sir Terry Leahy, Tesco built up a vast
and highly profitable overseas empire, stretching from South Korea and Malaysia, to
Hungary and Poland, and also embracing the US and China, across hypermarket,
supermarket and convenience store formats.
Clubcard database and Dunnhumby Tesco was early into the loyalty card
market in the 1990s, developing the Tesco Clubcard into a valuable marketing and
promotional tool, thanks to the customer database analysis of its in-house data
research business. Dunnhumby has helped Tesco stay close to its customers around the
world.
Property strength Tesco has a valuable freehold-property portfolio and store
land bank, both in the UK and overseas. It provides a stream of profits from sale and
leaseback deals and a source of potential finance from IPOs and joint ventures.
Diversification into banking and services Tesco has built a profitable Services
Division, at first focused on the insurance and telecoms markets, but now spreading
into other financial services.
Online pioneer Tesco was an early pioneer of online shopping in the UK, via
Tesco.com, and has always appeared to make useful profits from home delivery,
extending into non-food and other markets through Tesco Direct, while Tescos clickand-collect capability and expertise is now being exported into Tescos overseas
operations.

Weaknesses

UK business mature and neglected Chief executive Philip Clarke inherited

long standing issues in the UK that had built up during his predecessor Leahys time.
UK profits were, in effect, milked to finance the overseas expansion, leaving the quality
of the shops, the staff service and the ranges lagging behind the competition.
Huge losses in the US Tesco took on some strong local chains in the US on the
west coast in 2007 to start Fresh & Easy. However, the business has struggled from
the start. The business has evolved, but it is still losing money and absorbing a lot of
management time. A review of its future was revealed in November.
Management uncertainty There are fears Clarke has too much on his hands
running the PLC and the UK division, following the departure of the UK managing
director, Richard Brasher, in March. This has been followed by the exit of deputy chief
executive Tim Mason in November. Though there are some encouraging signs of
progress in the UK, he remains under pressure, given the setback in group profits in
2012/13 and the departure of many experienced senior executives in recent years.

Hypermarkets Evidence shows that consumers are moving against shopping in

big hypermarkets, so Tesco is exposed with its giant Extra stores, both in the UK and
overseas. Hypermarkets - stores with selling space of more than 60,000 sq ft - make up
35% and 85% of Tescos total selling space in the UK and overseas respectively.
Non-food exposure With the pressures on discretionary consumer spending
around the world, Tesco is heavily exposed to non-food merchandise.

Opportunities

UK store revamps Having set aside 1bn to invest in Building a Better Tesco in
the UK, Tesco is making the most of its existing stores, rather than adding new space,
and is refreshing its stores with a warmer ambience, putting Food first, and increasing
staffing levels to help customers.
New advertising stance Tesco has acknowledged it needs to improve its image
in the UK and last July hired creative agency Wieden + Kennedy to handle its marketing
activity.
Banking services Given the disenchantment of the UK public with the big banks,
Tesco has a significant opportunity to build on the trust in its brand and exploit the
footfall in its stores by offering more mortgage products and banking services to its
loyal Clubcard customers.

Threats

UK competitors The UK retail sector is competitive and while Tesco tries to reposition and catch up with what its rivals are doing in fresh food, Sainsburys, Asda and
Morrisons are expanding and investing in their own businesses.The top and the bottom
of the market provide no easy pickings either, given the strength of Waitrose and
discounters such as Aldi.
More overseas problems Tesco is not exposed to the issues of the peripheral
Eurozone countries such as Spain, Italy and Greece, but central Europe has not been
immune to the fall-out from the Eurozone crisis. Tescos operation in South Korea is
being constrained with Government restrictions on shop opening hours, while China
remains problematic.
Falling between stools Given the strength of competition that Tesco now faces,
the nightmare scenario remains intact: it is possible that the UK wont fully respond to
all the investment being thrown at it. It is possible it will now exit the US; the Bank may
fail to deliver on its promise because of consumer inertia; and the operations in Asia
and Europe may have to run increasingly hard just to stand still in a tougher and more
regulated economic climate.

*In terms of most recent annual sales

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