The Tesco difference

"Come rain or shine, the Tesco juggernaut just keeps rolling on," says Jeremy Warner in The Independent. And those Those looking for signs of a road crash in Tuesday's annual results will have been sadly disappointed, he says. "On virtually every level, the outcome was outstanding."

The world's third-largest general retailer after Wal-Mart and Carrefour reported pretax profits up 5.7 per cent for the year ended February 23, to $US5.6 billion, on a revenue gain of 11.1 per cent, to $101.7 billion.

The strong results, which met analyst expectations, underscore two vital points, says Mark Scott in Spiegel Online. "First, Tesco did well despite weakening consumer confidence – or perhaps because of it. As an aggressive discounter, it is thriving as customers shy away from pricier fare.

"Second, although growth is slowing in developed economies chilled by the global credit crunch, Tesco continues to rack up huge gains in emerging markets from Hungary to Malaysia."
The proof is in the numbers, says Scott. Tesco's revenues in Britain climbed 6.7 per cent for the year, to $US74.5 billion – roughly twice the growth rate of the economy as a whole – and its operating profits rose 7.1 per cent.

Sales outside of Britain surged 25.4 per cent, to $27.2 billion, and profits jumped nearly as much, by 24.3 per cent. International sales now constitute more than half of Tesco's revenue growth, says chief executive officer Terry Leahy. And according to the not-so-understated Sir Terry, the international businesses have the potential to be two to three times as big as they are today.

It all sounds a bit too good to be true, says Warner. "Yet Tesco has confounded the sceptics for so long that pretty soon we may have to learn to believe these glowing appraisals of the future."

What's more, there are plenty of reasons for believing it may remain largely immune to the current downturn. Indeed, supermarkets can be major beneficiaries in a recession as spending swaps from eating out to eating in, and in non-foods to the cheaper forms of produce found on supermarket shelves.

Yet the bigger reason for thinking Tesco will remain resilient is its overseas expansion, says Warner. "The strategy carries substantial risk, yet so far the execution has been close to flawless," taking the company into growth markets relatively unaffected by the West's economic malaise.

Tesco's growth in Eastern European countries like Poland and the Czech Republic has benefited from aggressive marketing and rollout of new stores, which have kept sales growth in the double digits, says Scott. After taking over 11 Carrefour outlets in the Czech Republic during 2006, for instance, the British retailer says same-store sales rose 11 per cent year over year.

Tesco's Asian operations also are on the tear, particularly in Korea, where sales at the company's online grocery division have risen 125 per cent since last year. The company boosted its stake in China by buying 90 per cent of local supermarket chain Hymall for $353 million in 2006, and the expansion has potential to continue.

Perhaps the biggest question mark hanging over the company is the fate of its new US push, says Scott. Tesco launched a chain of midsize stores in the US called Fresh & Easy, opening the first of the outlets in California last November.

But on April 2, having opened 60 stores, the company revealed it would halt its rollout for three months to tweak the formula. Brokerage Piper Jaffrey estimates that Fresh & Easy revenues in the six months since launch may have totalled only $30 million – some 70 per cent below its original forecast.

Nevertheless, Tesco says it's not pulling out and that it still plans to open around 150 new stores this year. "I'm very encouraged by what I see," Leahy told analysts on Tuesday, conceding that "it's still too early to make definitive judgments."

So, even the company's US venture can' be called a flop. But eventually, says Warner, "something within Tesco will break and the juggernaut will skid. Yet for the time being, it remains hard to see where the fault lines in this finely tuned machine might lie".

The Tesco juggernaut may skid one day but for now the finely tuned machine rolls on, Jeremy Warner, The Independent

Tesco defies gravity, Mark Scott, Spiegel Online