United Kingdom-Tesco make over Three Billion profit.
UNITED KINGDOM-TESCO HAVE A GREAT YEAR.
TESCO BOSS Sir Terry Leahy looks set to uncork yet another set of record results on Tuesday, but he may still have to leave his award-winning Blanc de Noir champagne in the chiller cabinet.
Despite expectations that the supermarket will become the first UK retailer to announce annual profits of £3 billion - a near 10% lift on 2008 - there are concerns that its balance sheet is beginning to groan under the weight of recent expansion moves and that it is losing ground to rivals in the UK.
Close watchers believe that the group’s net debt may now be nudging the £10bn mark - some £2bn above group forecasts - following the acquisition of Royal Bank of Scotland’s stake in Tesco Personal Finance and a major takeover in South Korea.
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There are also concerns over the health of the group’s pension schemes, where analysts believe the actuarial deficit may be anywhere between £1bn and £2bn as a result of the effects of last year’s stock-market slide on investments.
The group has more than 26,000 employees in Scotland, many of whom are members of the pension scheme.
Followers claim that Leahy will move to soothe investors’ fears by announcing plans to step up property sales after a hiatus in recent months, and Tesco could chop capital investment spending to as little as £3.5bn this year, a full £1bn down on the 2008 budget.
The UK will bear the brunt of the cash savings moves and it is understood that Tesco has cut back on both its property acquisition team and put on ice most of its plans for mixed-use developments, including its proposals to build 2000 homes by the end of 2010. Expansion plans for its Fresh & Easy stores in the US are another area under review after the new operation chalked up estimated losses of more than £100m last year.
Tesco could also further reduce its spending on advertising and promotion, although it already lags behind some of its rivals, including Asda, which is a regular on our TV screens.
Leahy, who usually plays down his UK market successes, will nevertheless have to defend the group’s marketing strategy after losing share to rivals Morrisons, Asda and Sainsbury’s as well as cut-price discounters such as Aldi and Lidl.
Much criticism has been centred on the potential confusion caused by Tesco’s use of unfamiliar discount brands such as Daisy laundry products and Trattoria Verde pasta as alternatives to its own cheaper Value offerings and more expensive branded products.
Despite the niggling concerns, Tesco followers stress that the group remains the UK’s most successful retailer in more than a generation and is fast closing the gap on Carrefour to become the world’s second biggest, after Asda owner and US colossus Wal-Mart.
(Tesco’s annual sales of an anticipated £53bn lag behind the £78bn recently announced by the French group but it is making almost twice as much profit and has a larger stock-market valuation.) Much of the recent growth has been overseas, with sales in Europe expected to rise by nearly 30% to approaching £9bn and those in Asia showing a 20% increase to around £6.7bn.
The overseas contribution is certain to show further good growth this year following the South Korean acquisition, although questions remain over Thailand as a result of political unrest, and the economic woes of some other countries, including Ireland, the Czech republic and Turkey.
But a major focus will be on Tesco’s plans to set up a full service bank under former finance director Andrew Higginson, following its takeover of the 50% stake in Edinburgh-based Tesco Personal Finance from RBS.
The division recently celebrated its 10th anniversary by announcing annual profits of more than £200 million, but Tesco believes it is only scratching the surface of its potential as it prepares to open another 30 dedicated outlets in its stores after a trial in Glasgow.
The group believes that the bank, together with other services such as the internet and telecommunications, could make £1bn profits in a few years against a current level of little more than £400m.
But directors will have to assure investors that current cash constraints will not delay investment in IT systems to enable the bank’s planned offering of new services, such as current accounts and mortgages, over the next 18 months to two years.
Tesco is aiming its banking operations at the 13 million people who have loyalty cards and earn points for every time they shop at the store or nominated outlets.
But these people will be hoping that the group steps up rewards presently available with the company’s clubcard credit cards, which offer just one Clubcard point for every £4 spent outside the stores, compared with four points for in-store purchases.
