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.
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.