Jon Copestake, Retail Analyst at The Economist Intelligence Unit:
“There is no doubt that Clarke should be given more time to enact his turnaround plan for Tesco but, despite a good period of Christmas trading, the jury is still out over Tesco’s performance so far under his leadership. Falling profits can be attributed mainly to the substantial write-downs related to Tesco’s exit from the US, as well as the revaluations of its UK property portfolio and its operations in the Czech Republic, Poland and Turkey. But the cost of turning round its UK business has also taken a toll, given the domestic market accounts for two-thirds of the retailer’s fortunes (both in revenue and profit terms).
“Not only is UK consumer spending weak, but Tesco has also found its domestic share squeezed by competitors at the premium and discount end of the market. Mr Clarke ousted the UK chief executive over a year ago to take closer control of domestic affairs. But some of the decisions taken such as piecemeal investments in Giraffe and Harris + Hoole seem to complicate the previous “back to basics” strategy that focused on providing better service and store revamps.
“Exiting the US market is likely to be the main focus for many observers, however. This decision is long overdue given that the Fresh & Easy division failed to make a profit in 7 years of operating. However, a refocus on the UK market should not come at the expense of other foreign investments. Though profits in Asia have been hit in the past year by trading restrictions in Korea as well as market slowdowns and currency shifts, they have more than doubled in the past five years. They should be set to grow further now that Tesco has sold of its underperforming Japanese operations.”
Neil Saunders, Managing Director of analyst firm Conlumino:
“On the home front, while Tesco’s results remain muted there is a sense that the business is now heading in the right direction as the “Build a Better Tesco” strategic plan starts to deliver. While for the full year, LFL sales remain in negative territory there is a clear momentum over the reporting period with a particularly strong performance in quarter 4 (LFLs up 0.5%), which encompasses the all-important festive trading period. Given the scale and maturity of Tesco’s business and the highly competitive state of the market this is a solid underlying performance that indicates that some of the initiatives are now having an impact on consumer behaviour.
“Over the next few years, the clear priority in the UK is investment in the customer experience across all channels, but especially in-store. This is something Tesco has been guilty of neglecting in the past and it has damaged customer loyalty, retention and, ultimately, sales. Going forward, given that Tesco’s growth will be much less reliant on opening new space, getting more out of existing stores becomes doubly important. The refreshes, which now number 300 stores and around a quarter of Tesco’s UK selling space, are not necessarily ground-breaking in their thinking but they are a significant step up and provide a more pleasant and engaging shopping experience for the consumer.
“The various acquisitions and partnerships Tesco has put in place, including Giraffe, Harris + Hoole and Euphorium bakery, provide a clear indication that it intends to significantly enhance the future in-store experience by introducing strongly branded added-value propositions. Directionally, we believe this thinking is correct and it demonstrates that Tesco clearly understands the importance of providing differentiation over and above competitors, giving its stores more of a destination status, and the increasing importance of leisure within traditional retail.”
Joshua Raymond, analyst at Cityindex
“Tesco saw pre-tax profits fall 51.5 per cent to £1.96 billion with full year underlying profits down 14.5 per cent. Q4 sales rose 0.5 per cent which marked a slowdown from the 1.8 per cent sales growth seen in the six weeks over Christmas (the same 1.8 per cent growth that Sainsbury’s challenged as disingenuous).
“At the same time, Tesco wrote down the value of its UK properties by £804 million as it indentified more than 100 sites which the company no longer plans to develop. Shares opened two per cent lower in trading as investors reacted the earnings report but the falls were not dramatic and reflected investors locking in some gains after Tesco’s shares price rallied 25 per cent since October last year.
“These set of numbers are effectively Tesco ‘taking out the trash’. They are cleaning their books after a year spent trying to refocus the business to its core markets where it has lost market share to rivals in an effort to diversify its business through growth abroad. The write off in its loss making US business was widely expected and comes broadly in line with market consensus. The disappointment however will be in the weaker sales growth for their fourth quarter and this will raise concerns that whilst the company’s turnaround plan had started to turn a corner, the depth of that turnaround remains somewhat shallow.”
Peter Saville, Partner at advisory and restructuring firm Zolfo Copper:
“Tesco has certainly hit a rough patch. The recent impact of the horsemeat scandal, new trading hour restrictions in South Korea – its biggest international market - and poor performance in the US have all put a strain on the retailer. Philip Clarke will now need to focus on Tesco’s UK strategy and rebuilding consumer confidence in the brand in its home market.”
“Tesco misread the market despite considerable research. By starting the Fresh & Easy venture from scratch, rather than acquiring an existing business, the subsidiary lacked efficiency and failed to capitalise on an existing presence. When business ventures like this go wrong, it is important for retailers to act quickly by assessing which strategies or divisions of their business are no longer working and exiting before its too late.”
“Tesco’s turnaround plan is set to reshape its British hypermarket portfolio and revive its domestic business. The grocer’s recent decision to buy Giraffe is certainly a step in the right direction, along with its stake in coffee shop Harris + Hoole. By installing these outlets in its larger stores, Tesco will make more effective use of its vast floor space and become a more attractive destination for consumers.”