Tesco takes drastic measures and makes big loss

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.