Tesco tightens its grip

Britain's number one food retailer can do nothing wrong, or so it appears. Tesco​ has today reported strong double-digit increases in both sales and profits for the first half of the year, driven by expansion both at home and abroad.

Sales for the half were up 17 per cent to £14.9 billion (€21.1bn), while pre-tax profits were up 17.4 per cent to £628 million, helped by organic growth and a number of strategic acquisitions.

Total operating profits for the group were up 16.9 per cent to £692 million during the half. Operating profits in the UK were up 16.2 per cent to £624 million, while the rest of Europe saw growth of 58.3 per cent to £57 million. Asian operating profits were ahead 78.3 per cent to £41 million.

In the UK, sales grew by 14.2 per cent to £12 billion, of which 6.3 per cent came from existing stores and 7.9 per cent from new stores, including 4.8 per cent from the T&S convenience store chain which Tesco bought late last year.

But Tesco is not only benefiting from owning more stores in the UK, it is also continuing to drive sales at its existing outlets: volumes rose by 6.2 per cent during the six-month period.

Tesco is also by far the most international of the leading UK retail groups, and its overseas business is contributing more and more to the company's overall growth. In the first six months of the year, total international sales grew by 30 per cent to £3 billion, with the rest of Europe posting a 32.1 per cent rise to £1.7 billion and Asia lifting revenues by 27.4 per cent to £1.3 billion.

Tesco is one of four retail bidders for the Safeway chain in the UK, but its market leading position makes it probably the least likely to win approval from the regulators. But whether or not the company gets the nod from the Competition Commission - and a decision could come as early as next week, according to rumours in the UK press today - Tesco still has its sights set on increasing its share of the UK grocery retail market from the 12.3 per cent share it currently holds.

Diversification is the key to achieving this goal, according to Tesco, and the company now operates a range of different store formats across the UK.

The acquisition of T&S will give Tesco's Express convenience store arm a major boost, with 136 of the acquired stores set to be converted this year alone. The company's own store development programme also continued apace during the first half, with 39 new stores opening for business, including several Express convenience stores and a number Extra superettes.

But diversification also means selling more than just food. A day after rival Sainsbury announced the launch of a major new non-food range, Tesco stressed that it was already a major player in that field, with garment sales in particular growing during the first half.

Tesco's personal finance business, its Internet shopping business and its new telecoms unit all continued to grow during the half.

Growth in the UK will inevitably focus on smaller stores, not least because of the tough planning restrictions there, but Tesco does not face the same problems in its international business, where the hypermarket format is its preferred store design.

A further 37 hypermarkets will open this year in Eastern Europe and Asia, and the company's two leading markets, Hungary and Thailand, are already near to achieving Tesco's self-imposed targets for sales, profits and returns.

In Poland, the company has successfully integrated the HIT stores acquired in July last year, while a further four stores will open this year. In the Czech Republic and Slovakia, where trading as been tough, Tesco said that like for like sales were finally beginning to improve on the back of a stronger pricing position.

Tesco will have 88 hypermarkets throughout Central and Eastern Europe by the end of this year, making it the biggest large-store operator in the region.

The company's other main international operations are in Asia. In Thailand, it has 55 stores, and claims to be growing at a faster rate there than any of its competitors, rolling out the same variety of store formats as it has in the UK. It already has 10 Express convenience stores in Thailand and a further 40 in and around Bangkok are planned over the next two years.

The Korean operations were impacted by the economic slowdown and tightening of credit availability there, while sales grew strongly in Taiwan and Malaysia during the half.

Japan is set to be the next big market for Tesco following the acquisition of the 78-store C Two-Network there earlier this year. Tesco also confirmed that it is exploring opportunities in China and Turkey.

The expansion of its business in Asia has also prompted the UK-based group to develop its own supply chain operations there, a move which will ultimately lead to improved productivity and margins.

Unlike many of its international rivals, Tesco has no operations in Latin America and so has been spared the impact of currency devaluations which have taken their toll on results at companies such as Carrefour or Ahold. Tesco may still be some way behind European rivals Carrefour and Metro when it comes to international operations, but its hugely successful UK business model is now being rolled out across the globe and much is expected in coming years.

Tesco would surely be among the leading candidates to buy Ahold's European or Asian businesses if it is forced to sell them off to ease its own financial troubles, but even if this possibility does not arise, Tesco is unlikely to slow the pace of growth in any of the international markets where it operates.

Nor is its UK dominance likely to be challenged in the near future, with Sainsbury still lagging far behind and even fast-growing Asda failing to keep pace with Tesco's phenomenally successful expansion.