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Tesco reviews Fresh & Easy as UK LFLs fall

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Grocery giant Tesco is undertaking a strategic review of its US-based food chain Fresh & Easy as the arm’s CEO Tim Mason stands down from his role after 30 years with the business, it has been announced today.

Financial advisers Greenhill have been appointed “to assist with the review of options”, the grocer said, noting that several interested parties have approached them over acquiring part or all of the Fresh & Easy business.

In October, Tesco outlined constraints in new capital investment as it sought to reduce costs and improve the profitability of Fresh & Easy stores, though the retailer acknowledged today that the strategy was not enough to deliver significant returns to shareholders.

In June, the supermarket announced plans to exit Japan as it failed to make inroads into the crowded convenience market in the country and this latest move will see Tesco further diminish its international reach.

Commenting on the decision, Tesco CEO Philip Clarke said: “Following a year in which my priority for Fresh & Easy was to improve its performance, I have now made a fully-informed assessment of its longer term potential.

“Whilst the business has many positives, its journey to scale and acceptable returns will take too long relative to other opportunities.

“I have therefore decided to conduct a strategic review of Fresh & Easy, with all options under consideration.

“Tim Mason, who leaves Tesco today, has played an important part in our success over a 30 year career with the company, and he leaves with my thanks and good wishes.”

Over its third quarter, Fresh & Easy like-for-likes (LFL) sales fell to 1.8 per cent growth compared with 6.8 per cent LFL growth in Q2, highlighting the necessity of a full review.

In the 13 weeks ending November 24th 2012, group sales rose 2.4 per cent though in the UK, LFLs excluding VAT and petrol declined 0.6 per cent despite the efforts of the grocer’s six-point plan to ‘Build a Better Tesco’ in Britain.

The main focus of the plan is to improve growth within its food business and food LFLs grew 1.2 per cent for the quarter, outperforming the market.

Refreshing the group’s existing portfolio has also been a key part of the plan and nearly 300 stores have now been refurbished with a new bakery department now available in 850 stores nationwide.

Increasing its product range in order to compete with rivals has seen Tesco add 1,200 new or improved own-label products and the retailer also launched its Christmas ad campaign over the quarter.

Online sales delivered growth of 15 per cent over the period compared with the same period last year while its Click & Collect service is now available across 1,500 stores for shoppers to collect general merchandise.

Discussing the performance of the latter category, a statement from Tesco said: “Like-for-like sales further reduced in general merchandise, which has led to a greater drag on overall UK performance in the quarter.

“While this partly reflects the continuing weakness in consumer demand that is being experienced by the market as a whole, we are renewing our efforts to deliver sustainable, profitable growth in this part of the business.”

Clarke also conceded that work needed to be done across the category in the coming months in order to reverse the company’s fortunes.

“Our general merchandise performance overall in the UK was not good enough, and we are renewing our efforts to deliver sustainable, profitable growth in this part of the business.

“We have seen a further weakening in consumer spending in Central Europe, although the effects of this have been partly offset by a better quarter in Asia.

“I am looking forward to the important seasonal period ahead, and am confident in our plans to deliver further improvements in our shopping trip for customers.”

Overall, the grocer’s firm attempts to re-establish itself at the top of the grocery food chain are ongoing and, while its probable exit from the US may initially spook investors, its long term plan should boost profitability in the months ahead, according to Shore Capital analyst Clive Black.

Black explained: “We see this Review as one of the most high profile and perhaps defining moments in Philip Clarke’s position as CEO of the Group.

“The move, however, follows on from a series of decisions that introduce more focus and capital discipline by Tesco, which if sustained and seen through will transform free cash flow generation and potentially lead to shareholder friendly outcomes.

“We back up this assertion by reference to Tesco’s exit from Japan and the dismantling of the prior management’s ambitious ‘opco-propco’ for China.

“Whilst we have been more tolerant of the Fresh & Easy model than some others, we welcome this review and believe that the market will too.”

Published on Wednesday 05 December by Editorial Assistant

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