Tesco is experiencing mixed fortunes on the international scene, with patchy performance in certain countries. Glynn Davis reports
Tesco’s strategy for world domination is well under way. According to international operations director Philip Clarke, it is “looking everywhere” and the chances are it will open up it its 13th market this year.
The US, Mexico and India, to name but a few, are countries with potential that Tesco has begun researching in the past five years. And the emerging Chinese market is also high on its shopping list.
Without doubt the international arena is where the company has the most potential to grow. At its full-year results, chief executive Sir Terry Leahy highlighted the impressive opportunities for a division that now accounts for more than £7.6bn of group sales.
But such expansion it is not without its problems, according to a lengthy research note from the company’s broker, Merrill Lynch. It highlighted certain issues with the company’s achievements overseas - including a slowing growth in sales, a low return on investment (ROI) and low sales per square foot.
The note concluded that the company should consider pulling out of those markets where it has not secured a strong foothold. “Tesco has not achieved market leadership everywhere and, as you’d expect, where it hasn’t it is struggling… there may yet be occasions where Tesco will need to either ‘hit out in or get out of’ specific markets if ROI is the goal.”
Chief among the countries in question are Poland, the Czech Republic and Taiwan, with the latter singled out as an uneconomic unit (of only four stores), making it difficult to see how Tesco could progress there.
However, jumping ship is not necessarily the answer, say many City analysts. Mike Dennis, food analyst at CAI Cheuvreux, says: “There are issues, but I disagree that they can be solved by exiting the countries.”
While acknowledging that “the company did the wrong thing in only looking for the best sites - if it did this in London it would take 3.5 years to find a site,” he says Tesco has plans to address the situation. These will in turn provide a solution to the concerns over ROI.
Its plan involves going for secondary sites - sometimes on a sale and leaseback basis rather than continuing to only buy freehold units in prime locations. According to Dennis, this means the company will be able to add a hefty 5.9 million sq ft of overseas trading space by April 2006 without its capex (capital expenditure) “going through the roof”. Also, Tesco has not yet added clothing to its mix in some overseas territories and this seems a likely move at some point to help increase sales densities. It is known to have secured some overseas licensing rights to sell the Cherokee clothing brand.
As well as these reasons to hang tough in all its existing overseas markets, the politically driven Tesco is all about momentum and so it would strongly resist any appearance of retrenchment, says Paul Smiddy, analyst at RW Baird. “I think they are a bit like the Japanese and it would be like a loss of face to them.”
Whatever difficulties Tesco has had overseas, they do not seem to have been generally caused by the competition. While it might have suffered in certain countries from economic issues beyond its control, the consensus among City analysts is that Tesco has had to fight harder for market share in its domestic market than it has overseas. Wal-Mart in particular is not proving that tough a competitor. Of more trouble have been the German discounters such as Kaufland - especially in Central Europe - and the local brand leaders in each country. One major advantage Tesco has over its rivals is its ability to operate across formats. “The competition is either great at running large stores or mini discounters, whereas Tesco has all the formats,” suggests Dennis.
However, it seems likely that Tesco will continue to come up against the behemoth from Bentonville, since the US player will be intent on notching up some victories after having been frustrated in the UK.
Chuck Poirier - partner at major US-based outsourcing specialist CSC that works with the likes of Target, Kroger and Safeway - says its size dictates that it has to aggressively pursue an acquisition strategy if it is to keep up its annual growth rates.
The chairman of a logistics company that works with Tesco agrees: “As Tesco looks elsewhere, it must be seeing the Wal-Mart boys at every airport. Tesco are new to the international scene, while Wal-Mart is experienced. While Tesco is smug here in the UK, because Asda can’t get market share through acquisition, it is wary of Wal-Mart elsewhere.”
Whatever the fighting qualities of either party, it goes without saying that Wal-Mart has the greater funds for a protracted battle around the globe against Tesco. So how well placed is the UK grocer to continue to fund its international expansion?
Clive Black, analyst at Shore Capital, believes that with Thailand and Hungary self-financing, the company is over the period of greatest risk from its commitment of cash overseas. On the company’s recent full-year results, he calculates that overseas operations had an ebitda of £560m compared with capex of £760m.
And he predicts that over the next 18 months the company will increase its earnings as other countries become cashflow positive. For 2009 he forecasts earnings before interest and tax for the overseas business of £1bn out of a group total of £4.2bn.
Such numbers support the opinion of Smiddy, who believes the investment overseas has not had any detrimental effect on the core UK business - quite the opposite, in fact. “International expansion is not damaging group prospects; it’s enhancing it. The UK has not been drained of investment, because Tesco has out-invested its UK rivals.”
With this solid domestic backdrop, one of the questions facing Tesco is whether it should speed up its overseas expansion by acquiring assets?
Although Dennis says it has clearly been caught out by much slower consolidation in some countries than it expected, he has reservations about forcing the issue since Tesco’s acquisition record is patchy. And the company seems to agree because, despite assets being up for grabs from both Carrefour and Ahold, it has not been tempted to open its wallet.
What it should avoid is making any rash decisions because, as Shore says, it is in such a broad mix of territories that it has engineered a strategy for the short, medium and long term. Smiddy agrees and suggests the whole idea of a portfolio is to spread risk so that some parts will inevitably do better than others over different time-frames. These conclusions are, of course, based on information made available by Tesco; where certain analysts have a problem is with the company’s “opaque” levels of disclosure for each country.
This makes it very difficult to analyse the performance of each country individually and to calculate how much central infrastructure for the overseas elements is being absorbed in the UK. But while Tesco continues to deliver the numbers each quarter, they will undoubtedly be forgiven this irritation.
Tesco’s strategy for world domination is well under way. According to international operations director Philip Clarke, it is “looking everywhere” and the chances are it will open up it its 13th market this year.
The US, Mexico and India, to name but a few, are countries with potential that Tesco has begun researching in the past five years. And the emerging Chinese market is also high on its shopping list.
Without doubt the international arena is where the company has the most potential to grow. At its full-year results, chief executive Sir Terry Leahy highlighted the impressive opportunities for a division that now accounts for more than £7.6bn of group sales.
But such expansion it is not without its problems, according to a lengthy research note from the company’s broker, Merrill Lynch. It highlighted certain issues with the company’s achievements overseas - including a slowing growth in sales, a low return on investment (ROI) and low sales per square foot.
The note concluded that the company should consider pulling out of those markets where it has not secured a strong foothold. “Tesco has not achieved market leadership everywhere and, as you’d expect, where it hasn’t it is struggling… there may yet be occasions where Tesco will need to either ‘hit out in or get out of’ specific markets if ROI is the goal.”
Chief among the countries in question are Poland, the Czech Republic and Taiwan, with the latter singled out as an uneconomic unit (of only four stores), making it difficult to see how Tesco could progress there.
However, jumping ship is not necessarily the answer, say many City analysts. Mike Dennis, food analyst at CAI Cheuvreux, says: “There are issues, but I disagree that they can be solved by exiting the countries.”
While acknowledging that “the company did the wrong thing in only looking for the best sites - if it did this in London it would take 3.5 years to find a site,” he says Tesco has plans to address the situation. These will in turn provide a solution to the concerns over ROI.
Its plan involves going for secondary sites - sometimes on a sale and leaseback basis rather than continuing to only buy freehold units in prime locations. According to Dennis, this means the company will be able to add a hefty 5.9 million sq ft of overseas trading space by April 2006 without its capex (capital expenditure) “going through the roof”. Also, Tesco has not yet added clothing to its mix in some overseas territories and this seems a likely move at some point to help increase sales densities. It is known to have secured some overseas licensing rights to sell the Cherokee clothing brand.
As well as these reasons to hang tough in all its existing overseas markets, the politically driven Tesco is all about momentum and so it would strongly resist any appearance of retrenchment, says Paul Smiddy, analyst at RW Baird. “I think they are a bit like the Japanese and it would be like a loss of face to them.”
Whatever difficulties Tesco has had overseas, they do not seem to have been generally caused by the competition. While it might have suffered in certain countries from economic issues beyond its control, the consensus among City analysts is that Tesco has had to fight harder for market share in its domestic market than it has overseas. Wal-Mart in particular is not proving that tough a competitor. Of more trouble have been the German discounters such as Kaufland - especially in Central Europe - and the local brand leaders in each country. One major advantage Tesco has over its rivals is its ability to operate across formats. “The competition is either great at running large stores or mini discounters, whereas Tesco has all the formats,” suggests Dennis.
However, it seems likely that Tesco will continue to come up against the behemoth from Bentonville, since the US player will be intent on notching up some victories after having been frustrated in the UK.
Chuck Poirier - partner at major US-based outsourcing specialist CSC that works with the likes of Target, Kroger and Safeway - says its size dictates that it has to aggressively pursue an acquisition strategy if it is to keep up its annual growth rates.
The chairman of a logistics company that works with Tesco agrees: “As Tesco looks elsewhere, it must be seeing the Wal-Mart boys at every airport. Tesco are new to the international scene, while Wal-Mart is experienced. While Tesco is smug here in the UK, because Asda can’t get market share through acquisition, it is wary of Wal-Mart elsewhere.”
Whatever the fighting qualities of either party, it goes without saying that Wal-Mart has the greater funds for a protracted battle around the globe against Tesco. So how well placed is the UK grocer to continue to fund its international expansion?
Clive Black, analyst at Shore Capital, believes that with Thailand and Hungary self-financing, the company is over the period of greatest risk from its commitment of cash overseas. On the company’s recent full-year results, he calculates that overseas operations had an ebitda of £560m compared with capex of £760m.
And he predicts that over the next 18 months the company will increase its earnings as other countries become cashflow positive. For 2009 he forecasts earnings before interest and tax for the overseas business of £1bn out of a group total of £4.2bn.
Such numbers support the opinion of Smiddy, who believes the investment overseas has not had any detrimental effect on the core UK business - quite the opposite, in fact. “International expansion is not damaging group prospects; it’s enhancing it. The UK has not been drained of investment, because Tesco has out-invested its UK rivals.”
With this solid domestic backdrop, one of the questions facing Tesco is whether it should speed up its overseas expansion by acquiring assets?
Although Dennis says it has clearly been caught out by much slower consolidation in some countries than it expected, he has reservations about forcing the issue since Tesco’s acquisition record is patchy. And the company seems to agree because, despite assets being up for grabs from both Carrefour and Ahold, it has not been tempted to open its wallet.
What it should avoid is making any rash decisions because, as Shore says, it is in such a broad mix of territories that it has engineered a strategy for the short, medium and long term. Smiddy agrees and suggests the whole idea of a portfolio is to spread risk so that some parts will inevitably do better than others over different time-frames. These conclusions are, of course, based on information made available by Tesco; where certain analysts have a problem is with the company’s “opaque” levels of disclosure for each country.
This makes it very difficult to analyse the performance of each country individually and to calculate how much central infrastructure for the overseas elements is being absorbed in the UK. But while Tesco continues to deliver the numbers each quarter, they will undoubtedly be forgiven this irritation.
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