Tesco profits fall as supermarket pulls out of US

Tesco's annual profits have fallen for the first time in almost 20 years, as the UK's biggest supermarket confirmed it was pulling out of the US.

Tesco is exiting its US chain of 199 Fresh & Easy shops, which have never made a profit, at a cost of £1.2bn.

There was also a huge write-down in the value of Tesco's UK property portfolio.

The company's statutory pre-tax profits fell 51% to £1.96bn, but post-tax profits including the cost of the US exit were just £120m, down 95.7%.

Tesco said sales at UK stores in the past three months, excluding fuel and VAT sales tax, rose 0.5%, a slowdown from growth of 1.8% in the six weeks to 5 January when the company hailed strong Christmas trading.

The world's third-largest supermarket group, which reported a shock profit warning in January last year, has been restructuring under chief executive Philip Clarke.

As well as the US withdrawal, Tesco is exiting Japan and said it would take "a more measured approach to our growth in China".

Mr Clarke said: "The announcements made today are natural consequences of the strategic changes we first began over a year ago and which conclude today. With profound and rapid change in the way consumers live their lives, our objective is to be the best multichannel retailer for customers."

A £804m write-down in the UK property portfolio comes after a review in which Tesco identified more than 100 sites, bought mainly during the property boom more than five years ago, which the company no longer plans to develop.

Tesco is shifting its focus away from out-of-town stores and many of the properties will not be needed. Mr Clarke said: "The large stores we have are great, but 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."

For the year, total UK sales rose 1.8% to just over £48bn, with UK trading profit falling by 8.3% to £2.27bn.

Tesco said its online grocery division "has had another strong year", with sales growing ahead of the market, by 12.8% to £2.3bn.

The company last reported a fall in annual profits in 1994, since when it has grown into the dominant force on the High Street.

Changing landscape

Mr Clarke told the BBC that Tesco's profits had been hit because of the amount of money the company is investing in improving its operations.

Tesco had hired thousands of staff in the UK and revamped stores, he said. "We feel Tesco in the UK can be better for customers. That's what they want and that's what we're beginning to deliver."

He said that the US exit plans were "well-advanced", with interest from potential buyers for all or parts of the business. It would take about three months before the sale process was concluded, Mr Clarke said.

Ajay Bhalla, professor of global innovation management at Cass Business School, said that at the root of Tesco's US problems was a failure to understand that the US retail landscape is different from the UK's.

The drive to become ever-bigger, while offering lower prices, had worked for years, but made it difficult for Tesco to change course when needed, he said.

"The falling star of Tesco in the US is a harsh reminder that scale is not the recipe for sustainable value creation. For years, Tesco managers paid attention to perfecting the mix of supplier driven cost efficiencies with low prices.

"While Tesco paid attention to making its US venture work, the UK retail market evolved quickly. Customer service and quality gained the upper hand over low pricing, and Waitrose and Sainsbury's emerged as the preferable destination for the growing middle-class segment.

"Tesco's exit from the US is a reminder for managers of the dangers of going blindly for scale and cost leaders, the wheels of which are difficult to reverse if you need to change course to becoming a retailer known for first-class customer experience," Prof Bhalla said.