Tesco troubles mount as overseas restrictions hinder hypermarkets

Phil Clarke is under pressure to produce a reversal in fortunes. Picture: Getty
Phil Clarke is under pressure to produce a reversal in fortunes. Picture: Getty
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TESCO’S troubles appear to be spreading to its overseas operations, adding pressure on chief executive Phil Clarke’s turnaround plan.

The supermarket giant unveils first quarter trading figures tomorrow, and Eurozone financial turmoil and recession will see the City spotlight swing to difficult overseas markets following problems in its core UK patch.

Caroline Gulliver at broker Espirito said: “A fundamental issue for Tesco is that it has reached maturity in eastern Europe for hypermarkets. Now it is just adding smaller stores. This is disappointing [for the market] because Tesco has been seen as an emerging market growth story over the past decade.

“But the group obviously now feels there is less potential in the region for more big box hypermarkets.”

Darren Shirley, food retailing specialist at Shore Capital, said Tesco is also likely to have been hit by recent changes in key markets such as the Czech Republic and South Korea.

“There have been regulatory changes in South Korea, with hypermarkets having to close two days a month to protect small shops. Those restrictions on Tesco’s opening hours are likely to have had a negative effect,” Shirley said.

He added that an increase in VAT in the Czech Republic earlier this year was also likely “to have had an impact” on Britain’s biggest supermarket group, while trading at its Irish operations was almost certain to have been weak.

The depressed picture at Tesco’s lossmaking US subsidiary Fresh & Easy is also unlikely to have improved.

Unveiling a further £153m loss at the chain during the group’s annual results in April, Clarke pushed back Fresh & Easy’s break-even target of 2012-13 to an unspecified date.

Back in the UK, which accounts for 70 per cent of Tesco’s profits, same-floorspace sales are expected to have fallen again.

Tesco stunned the market in January with its first profit warning in decades after like-for-like UK sales fell 2.3 per cent over the Christmas period, followed by a 1.6 per cent fall in the final quarter of its financial year to the end of February.

Shirley said he expected a “modest worsening” in UK like-for-like sales of “minus 1 to minus 2 per cent, probably towards the higher end of that range.

“March, April and May has not been an easy quarter, with the weather being shocking in April and up against tough comparatives in the previous April when the weather was very hot,” Shirley said.

Gulliver at Espirito Santo said she expected a fall of 1.5 per cent in same-floorspace sales at Tesco.

Clarke, posting annual profits up 1.6 per cent to £3.9 billion in April, revealed that the group’s turnaround plan was likely to involve opening 40 per cent less space this year, recruiting 8,000 extra staff in its UK stores and spending £500,000 on improving the appearance of 400 of the group’s outlets.