Tesco Hits Record Profit, But Lags in U.S.

The world's No. 3 retailer continues to struggle with its Fresh & Easy chain of midsize grocers in America

By Kerry Capell

British supermarket giant Tesco (TSCO.L) shrugged off the global recession to post annual revenues up 13%, to $79 billion, and pretax profits that blew past the magic £3 billion mark ($4.4 billion), up 5.5% from the previous year. But even as it unveiled the highest profits ever recorded by a British retailer, Tesco—ranked No. 3 in the world behind Wal-Mart (WMT) and France's Carrefour (CARR.PA)—was forced to concede that it finds doing business in the U.S. not so easy.

After all, last year was when Tesco's much-heralded U.S. venture, Fresh & Easy, was supposed to take off. Instead, the West Coast chain of midsize food markets posted higher-than-expected losses for the year ended Feb. 28 of $206 million, up from $90 million the previous year. Prospects of achieving breakeven even this year look increasingly remote.

Ever the optimist, Tesco Chief Executive Terry Leahy claimed that despite the losses, he was pleased with the chain's progress. "Clearly nobody would have chosen to open into the recession that we've seen there, which is particularly stiff in the Western U.S., but the customers love the stores, and it appeals right across the income range, right across the age range, and that bodes very well for its long-term appeal," he said in a statement.

Back home in Britain, where Tesco is the country's largest retailer and commands a third of the supermarket trade, it has successfully combated the recession by slashing prices. That has helped it maintain market share among penny-pinching shoppers, even in the face of increased competition from such discounters as Wal-Mart's Asda chain and Germany's Aldi. Tesco introduced a new "Discounter" range last September, which Leahy says is performing better than expected. "These products have been specially developed so that we can sell, at a lower price, a very good product but at a planned margin," Leahy said.

Banking Angle

Tesco also is benefiting from its continued push into banking. The group's financial operation, Tesco Personal Finance, has prospered from the economic crisis as British consumers pull their money out of the country's troubled banks. Since last fall, the unit has seen a near-doubling of savings balances, to $6.6 billion, as of the end of February. Tesco, which bought out former partner Royal Bank of Scotland (RBS) last December, plans to open 30 bank branches in its stores by the end of this year. Leahy seemed to confirm Tesco's ambitions to push more aggressively into full-service banking. "We believe that we've got a good opportunity to grow that business…with the Tesco customer base, and we can have a bigger, better banking business," he said.

Still, discounting is taking a toll on Tesco's profit growth. The 5.5% uptick reported on Apr. 21 was the slowest in 15 years—and far less than the 11.8% posted a year earlier. At the same time, Tesco is feeling increased pressure from rival British chains Wm. Morrison (MRW.L) and Sainsbury (SBRY.L), which saw full-year sales rise 7.9% and 4.5%, respectively, vs. growth of just 4.3% in Tesco's like-for-like British sales.

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