The UK’s largest retailer Tesco has confirmed this morning that it is to pull out of Japan after failing to make its network of smaller stores in the country sufficiently profitable.
Tesco currently operates 129 small format store in the Greater Tokyo area of the Asian country, under the Tsurakame, Tesco and Tesco Express brands.
Over half of these stores are reportedly profitable but with the retailer’s last set of results promising no further capital to this branch of its business their was no realistic chance of growth.
Philip Clarke, CEO of Tesco, commented: “We have reviewed our portfolio in Asia and the performance of our business in Japan. Having made considerable efforts in Japan, we have concluded that we cannot build a sufficiently scalable business.
“We have decided to sell our operations there and focus on our larger businesses in the region, in line with our priority of driving growth and improving returns. I want to thank our colleagues in Japan for their continued dedication to the business.”
A formal sales process will now be undertaken by the global grocer over the coming months as a suitable buyer is sought.
Clarke is due to complete his review of the Tesco Group before its next set of interim results in October but he has already been busy making several management and structural changes to the firm.
Yesterday for example it was announced that an additional £28 million is to be invested in IT operations across the group, and investment firm Espirito Santo argues that the company’s Japanese stores were always likely to be a victim of Clarke’s reforming plans.
A note from the banking group today read: “This is not a huge surprise given the company fully wrote-down the goodwill attributable to the business at the last results and had already said it wasn’t going to allocate any more capital to it.
“Proceeds aside, this should be taken positively as new CEO Phil Clarke is sticking to his ‘no sacred cow’ mantra and making pragmatic decisions whilst addressing the key investor concern of deteriorating returns on capital in the international business.
“The price received, even if as lofty as 0.5-0.6x sales, would make little difference to the near £7 billion FY12e net debt, so it is arguably more important that these issues are being addressed by the new management.”