Tesco takes drastic measures and makes big loss | RetailDetail

Tesco takes drastic measures and makes big loss

Tesco takes drastic measures and makes big loss

British retail giant Tesco is taking drastic measures. Next to the existing recovery plan ‘building a better Tesco’, the multinational is making big write-offs on real estate and goodwill. This will cause profits before taxes to be halved when compared to the previous year. If the overall costs of the departure from the United States are also brought into the calculations, almost all of the annual profit will have disappeared.

Huge write-offs

Tesco had announced earlier it was selling its American operation Fresh & Easy, which is why this loss making operations is not included in the continued operations. In the recently published numbers about the fiscal year up to 23 February 2013, Tesco reports it estimates the cost for the withdrawal from the United States at one billion pound (1.2 billion euro).


That is a gigantic amount that eats up the lion’s share of the remaining profit (before taxes). That profit already was 51.5 percent lower than the past year, at 1.96 billion pound (2.3 billion euro), mainly due to a huge write-off on the value of real estate on the British market of 940 million euro and a much lower valuation of Tesco’s operations in Poland, the Czech Republic and Turkey (-579 million euro).


“Our plan to 'Build a Better Tesco' is on track and I am pleased with the real progress in the UK”, says CEO Philip Clarke. “We have already made substantial improvements to our customers' shopping experience, which are starting to be reflected in a better performance.”


The financial results paint another picture: annual profits in the UK dropped by 8.3 percent, according to Tesco because of investments in the improvement plan. Sales in the UK did rise by 1.8 percent, but identical sales are still under pressure and even drop a little bit.


CEO Clarke: not a soft healer

Philip Clarke will not blamed for being a soft healer, hence his drastic measures he explains on his blog. Striking is his statement about Tesco being surprised by a change in the economic climate in the US and Europe.


“We entered the US in 2007. At the time, the three states we were in – California, Arizona and Nevada – were the fastest growing in the US. Two years later, they were the worst performing, having been hit hard by the subprime mortgage crisis.”


Macro-economic tidings were also bad for Tesco in Europe. The purchase of companies in Poland, the Czech Republic and Turkey, turned out to be a bad idea, blogs Clarke: “When we bought those businesses, those three markets were some of the fastest growing in Europe. Today, their growth is much slower or even below zero.”


Bleed now, Band-Aids later

Despite the sale of Tesco’s 199 Fresh & Easy shops and the distribution centre in the US is not fully completed, Tesco writes it off in its entirety. “Although the sale process is well-advanced, it is not finished. Until it is we, have written down the value of the assets and included provision for leases which we cannot break. We should recover some of the capital when we agree a sale of the assets but for now we are writing it all down”, says Clarke.


Bleed now and a Band-Aid later: that is the communication strategy. More fundamental is the acknowledgement of Clarke that Tesco anno 2013 got caught up by retail reality – and that reality is digital. The enormous amount of real estate locations of Tesco, were a sure thing for success in the previous century, but currently it is rather a millstone around the company’s neck.


Clarke sees there is less value in having lots of real estate: big stores are not necessary any more. “We won’t need many more of them because growth in future will be multichannel – a combination of big stores, local convenience stores and online”, says Clarke.

Questions or comments? Please feel free to contact the editors

“Shopping should be stripped of its worthless moments”


Retailers face a simple choice today: speed up the shopping experience or slow it down. That is Insider Trends’ Head of Trends, British Cate Trotter’s, opinion. She is one of RetailDetail Congress’ keynote speakers on 27 April.

Consistent growth for lactose-free category


The market for lactose-free products is still growing as an increasing number of customers choose lactose-free items as part of a healthy lifestyle. This is turning the gluten-free, sugar free and health food category from niche into mainstream. 

European Commission clears path for cross-border online purchases


The European Commission has proposed several new measures to grant consumers easier access to foreign web shops. One measure is that these web shops cannot refuse a customer based on his residence.

Budget brands are losing their fight against hard discount


Budget private labels are not the right strategy to fight off hard discounters, according to the International Private Label Consult (IPLC). Their inferior quality damages a supermarket's brand image and its margins are dwindling.

Frans Muller: “You have to make choices as a retailer"


Delhaize CEO Frans Muller will have to guide the Ahold - Delhaize integration in the next few years, but what can we expect? He will divulge his vision extensively at the upcoming RetailDetail Congress. 

Opinion: Entire value chain is under pressure


Why are farmers pushed to the brink, as the Panorama report about supermarket prices showed on Canvas? The entire chain is under tremendous pressure nowadays, according to retail expert Jorg Snoeck.