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Sat, Jan 22, 2005 - Page 12 News List

UK retail giant Tesco wary of fast expansion

PROFIT Far from `hyping' their latest excellent results, executives at the UK's leading supermarket chain are doing their best to play them down

THE OBSERVER , LONDON

It's difficult to be ambivalent about the British supermarket giant Tesco: people either love it or hate it. Shoppers have been flocking there, as its latest results show. But the store has many critics who complain about its "junk food" and its dependence on food imports instead of local, and fresher, supplies.

Tesco has revealed it is on course to meet market expectations of ?2 billion (US$3.74 billion) profits for the current year, but it went out of its way to steer analysts away from even higher expectations.

With good reason: Tesco, with just under 30 percent of the UK grocery market, accounts for ?1 in every ?8 spent in UK shops. Its expansion has been sensational, but there are limits -- although the financial markets just love pushing expectations to the limits, so much so that Tesco's shares fell 2.9 percent on Tuesday after confirmation of strong sales and profit figures.

Far from "hyping" their results, Tesco executives are doing their best to play them down. Thus finance director Andrew Higginson has been trying to divert attention from the "near 30 percent" market-share figure to 18 percent, which he says is the Tesco proportion of all food sold in the UK, as opposed to combined supermarket and grocery sales.

"We didn't want people to get too enthusiastic," Higginson told the Financial Times. Earlier Tesco's chief executive Sir Terry Leahy had told the Observer newspaper that "size is a mixed blessing" and warned "size does not give you automatic protection from competition."

Tesco chiefs are clearly concerned that their commercial success will attract accusations of "monopoly" (traditionally any company with a third of the market is considered to have a monopolistic dominance which is inimical to competition).

However, they are well aware that Tesco itself was once considered a down-market poor relation to companies such as Marks & Spencer and Sainsbury, each of which was as fashionable in its day as Tesco is now, only to fall out of favor. Thus in the corridors of power in London, where under New Labour businessmen are considered to know all the answers, some officials look with envy at Leahy.

"He would be just the man to sort out the immigration service" said one this week.

Old hands recall, however, that, when Marks & Spencer was the flavor of the decade in the 1980s, then prime minister Margaret Thatcher enlisted one of its top executives, Sir Derek Rayner, to liven up the British civil service -- with very mixed results.

Leahy sees Tesco's main future expansion being abroad, most notably in Asia, where it already links with Chinese hypermarkets, and it has done serious research in Japan. However, the company will have learnt much from observing the unfortunate experience of Marks & Spencer in some of its overseas ventures.

Leahy's belief that "size is a mixed blessing" will ring bells with many shoppers. Most of us, while using supermarkets, loathe them, and bemoan the disappearance of corner shops: I certainly feel that shopping in small shops is much more pleasant.

Indeed, Tesco and Sainsbury have recognized this point, and have been opening their own version of the corner shop -- much smaller branches that are less forbidding to visit.

And my own family? Well, we've given up going to supermarkets altogether, and use a delivery service set up by an enterprising group of former merchant bankers. The other weekend, when the delivery man and I were reminiscing about how grocery delivery vans represent a return to the happy days of the 1950s, he said, "Yes, and my mother used to give the delivery man a cup of tea."

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