UK supermarket operator Tesco’s half-yearly results suggest the European recovery might not be as robust as hoped.
It seems Europe and its consumers aren't fully embracing emergence from a recession, judging by a decline in sales at the retail heavyweight.
Tesco’s rate of sales in Europe fell 3.1 per cent at constant rate against the previous comparable period. Like-for-like sales were down 5 per cent. Imagine if Coles or Woolworths reported a similar fall in sales during a time when the local economy was coming out of a recession.
Australia has had a confidence crisis but majors Coles and Woolworths grew their food and liquor sales at 5.5 and 4.7 per cent respectively during the last financial year.
Management commentary from Tesco casts an entirely different view on the state of affairs in Europe than the picture created by improving economic data in the Euro zone. Tesco lament a difficult economic environment and the desire of households to manage budgets on a day-to-day basis as the reason for the fall in sales.
Much of Europe’s recovery has been attributed to banks bolstering balance sheets, minimising the threat of a collapse of the financial system. However, this could be a sign to turn attention to what is actually happening on the ground in Europe – how do consumers feel about the state of the economy and the future of it. It would appear they aren’t willing to spend what cash they have.
The latest Retail Trade Index for the Eurozone confirms turnover is lowering, approaching levels not seen since early 2010. The white line represents monthly changes while the smoother, orange line is the moving average. Alarmingly, retail sales have come down from highs reached in 2011 even as the economy marches out of a recession.
While Tesco’s bid to expand into the US market failed and they acknowledged they need a partner in Asia, Europe is a different beast. Tesco chiefs have been open in acknowledging past mistakes. While the European result wasn’t necessarily a management fault, this area of Tesco’s business will demand much more time from executives if they want to avoid a catastrophic 68 per cent fall in profit again.