Tesco suffers first profit fall in 20 years

Tesco has cancelled plans for UK expansion. Pictured is Tesco Extra in Costorphine. Picture: Neil Hanna
Tesco has cancelled plans for UK expansion. Pictured is Tesco Extra in Costorphine. Picture: Neil Hanna
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TESCO chief executive Philip Clarke yesterday admitted defeat in a six-year drive to crack the American market and announced the closure of its Fresh & Easy chain.

The decision to exit the US was widely expected after Clarke included the business in a recent strategic review, Fresh & Easy never having made a profit since its 2007 launch by his predecessor, Sir Terry Leahy.

Talks have been held with a number of potential buyers of its subsidiary, thought to include Aldi and Trader Joe’s. Clarke, who took over the top job two years ago, declined to blame his predecessor for the costly US foray. “My job is not to look back and apportion blame… when you do something there is always a risk. We did something a long way from home,” he said.

Tesco said that an update on the progress of any sale would come within three months. The company disclosed that it was taking a £1.2bn hit on the US business and was also writing down the value of its property in Britain by £804 million. It took a hit of nearly £500m on the diminished value of its Polish, Turkish and Czech businesses.

The combined writedowns, and the impact of a £1bn investment programme to refurbish existing UK stores following a shock profit warning in January 2012, saw Tesco’s headline pre-tax profits fall 51 per cent to £1.96bn for the financial year to 23 February, 2013.

Underlying profits, excluding exceptionals, fell 14.5 per cent to £3.56bn. Clarke said the UK property writedown partly reflected a decision not to develop more than 100 sites as many more people have turned to online shopping in the past five to ten years. However, he added: “In future the [retail] winners will be those who have a combination of stores and digital assets, not the pure digital or pure bricks and mortar players.” Online sales in the year rose 13 per cent, topping £3bn for the first time.

The group bought the Giraffe child-friendly restaurant chain last month, and plans to open the eateries alongside larger stores and transform them into family-friendly retail destinations.

Tesco’s core UK operation saw profits fall 8.3 per cent to £2.3bn. Clarke said the “horse-gate” scandal had damaged the industry, adding: “It was terrible. I never imagined for a minute that food would be subject to that sort of fraud.”

He said Tesco had examined 1,700 products in the wake of the scandal, finding four products that were contaminated “which is four too many”.

Asian profits were down by more than 10 per cent, partly due to a regulatory clampdown on 24-hour trading in South Korea, while European profits slumped 37 per cent amid the eurozone’s continuing financial and economic difficulties.

Tesco Bank’s profits fell 15 per cent to £191m, mainly due to a further £115m charge for payment protection insurance (PPI) mis-selling. It takes Tesco Bank’s cumulative charge to £222m.

Clarke said he believed the bank, which employs 4,000 in Edinburgh, Glasgow and Newcastle, would get a lift next year from the launch of current accounts.

Tesco has maintained its total dividend at 14.76p through an unchanged final payout of 10.13p.