Tesco powers ahead of its rivals

Related tags Tesco Market Profit

Britain's number one food retail group Tesco surged further ahead
of its rivals in fiscal 2004 with double-digit increases in both
sales and profits. Performances improved in all four of Tesco's key
growth sectors, and with a large cash pile and strong balance
sheet, there seems to be little to stop the ambitious company from
posting further gains in 2004, writes Chris Jones.

Tesco's group sales rose by 18.7 per cent to £33.6 billion in the year to 28 February, and although part of the increase came from an additional week's trading compared to 2003, sales would still have been 16.7 per cent higher at £33.0 billion on a comparable 52 week basis.

Tesco recently raised £1.6 billion for future expansion though a share offering and property sales, and while it has wasted little time in putting this cash to good use (with acquisitions in the UK and elsewhere), it has not relied entirely on new stores for growth.

In the UK, for example, sales rose by 14.2 per cent to £26.4 billion during the year, of which 6.7 per cent came from the company's existing stores. This in turn was driven by a 6.6 per cent increase in volume sales, allowing the company to remain highly price competitive - an important factor in a market seen as becoming increasingly price orientated this year as both Tesco and Asda react to the wide ranging price cuts at Safeway following its takeover by Morrisons.

But expansion did play a major part in the company's UK performance in fiscal 2004, with the focus on the convenience store sector in particular. After the acquisition of T&S the year before, Tesco converted a number of stores to its Express format, taking the total to 277 and the company's share of the UK convenience store market to 5.7 per cent, while the acquisition of the Adminstore group towards the end of the period should give a further boost to sales in the current financial year.

The non-food business grew rapidly during the year, and Tesco now claims to be biggest UK retailer of certain products - in the baby goods market, for example, it claims to sell more than specialists Boots and Mothercare combined. DVDs and clothing were other major centres of growth in the UK market.

The Tesco.com online shopping portal continued to thrive, posting a profit of £28 million, up from £12 million the year before, making it one of the few profitable retail websites in the supermarket sector.

Tesco is by far the most international of the UK supermarket groups, with operations in Asia and central Europe. Sales from the international division were up 29 per cent during the year overall, with European sales rising 27.5 per cent to £3.8 million and Asian revenues rising 31.1 per cent to £2.8 million.

Performances in Hungary, Slovakia and Ireland were good, helped by buoyant economies there, but sluggish consumer spending in the Polish and Czech markets pegged back growth there.

The Asian unit was something of a mixed bag, with the Thai business increasing its market share and improving profitability while the Korean unit continued to struggle because of the weak economy there. The smaller units in Taiwan and Malaysia also continued to grow.

The international arena is likely to play an increasingly important role in Tesco's growth strategy, with over 100 news stores planned for the current year, not including potential acquisitions. The company made its first foray into the Turkish and Japanese markets in 2003/04, and China and the US could well be on the agenda this year.

With its strong cash flow of £2.9 billion, low debt levels and strong profit growth (pre-tax profits were up 21.9 per cent to £1.7 billion, at the top end of analysts' expectations), there is little to stop Tesco from further strengthening its position in the coming year. Expansion opportunities in the domestic market are limited - and there will surely come a time when the move into the convenience sector will be more tightly regulated than it is now - so the focus is likely to shift to foreign markets and to developing further non-food ranges and retail services.

Related topics Market Trends

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