Will Tesco be deposed as retail king?

Fresh and easy store in US - opening day

Tesco has probably had worse or more humiliating days. But not for a long time.

Pulling out of the US, with the abandonment of its Fresh & Easy venture, is costing it £1.2bn in money and probably as much again in loss of face.

Because of that loss, and the cost of revitalising sluggish British stores, profits have fallen dramatically - by 52% to £2bn before tax.

Even so-called underlying profits - which exclude a write-down of the value of property in the UK, a devaluation of businesses acquired in Poland, the Czech Republic and Turkey, and an increase in PPI compensation costs - have fallen 14.5% to £3.5bn.

Here is the thing: this is the first drop in reported profits at Tesco since 1993-94.

But how different the world was for Tesco 19 years ago.

Back then it was about to embark on a programme of expansion and sales promotion that would turn it into the UK's most powerful retailer (by far).

It was the challenger to the then leaders in both food and non-food, Sainsbury's and Marks and Spencer, and it was to squeeze them both till more than the pips squeaked.

Today, Tesco still looks for and enjoys growth in Asia, and online.


For all the mess it made of the US, it is still an unusual British business and British retailer in having made a success of initiatives in parts of the world where retailing culture and practice are very different from the UK (although a recent bashing in South Korea, due to regulatory changes, shows there will always be downs as well as ups).

However, in the UK its huge market share now makes it look less like an unstoppable juggernaut and more like a massive tanker that's hard to manoeuvre quickly or easily.

And in recent years Tesco has become vulnerable to attack from discounters like Aldi, old foes such as Sainsbury's and newer ones like Amazon.

That said, there have been signs in the past year that Tesco's costly investment to improve service and stock in British stores has stabilised the business. There has been a return to very modest growth in underlying or like-for-like sales in the second half of 2012-13, in spite of recent weeks' headwinds from horse in the mince, although growth at Sainsbury remains faster.

But here is the big change at Tesco, with which it is gradually coming to terms.

For years its success was built on its entrenched view of itself as the upstart pretender, running rings around the old retailing establishment.

Today it is the retailing establishment, which makes it the target rather than the challenger - and all the more vulnerable in an economic climate that is likely to remain inclement for years.

So it is a big moment for the company.

The chief executive, Philip Clarke, has had to reconstruct Tesco at home and abroad at considerable cost - which is what is visible in today's announcement that profits have halved.

The legacy he inherited from his garlanded predecessor, Sir Terry Leahy, has been considerably less benign than he expected - although the big reconstruction decisions are Clarke's and he will stand or fall on whether they work.

If serious recovery doesn't materialise at Tesco this year, questions will start to be asked - just as they were in the 1990s about M&S and Sainsbury - about whether Tesco's time as king of retail is over.

Update 08:25 BST

By the way, Tesco's pre-tax profit of just under £2bn does not include the costs of withdrawing from the US or its US trading losses.

Its American venture is being treated, for accounting purposes, as discontinued, so all its losses are being charged below the tax line, in its profit-and-loss account.

What this means is that, after tax, Tesco barely made a profit at all.

Here is the astonishing number: Tesco's post-tax profit was a paltry £120m, down 95.7% from the previous year.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 425.

    303 and others: if I choose to shop there because it is convenient, that's my choice, I am the customer and the customer is always right.

    No business and no business model has any claim on the loyalty of its customers. High Street shops have no divine right to protection from supermarkets - nor brick-and-mortar shops from online traders.

  • rate this

    Comment number 424.

    Loads of comments about miserable/unhappy staff in Tesco. They are paid pittance wages which are predicated on benefits and child tax credits etc. So Tesco et al are not just screwing their staff but also their customers and tax payers who would not dream of stepping into their stores. They would never get the once proud Investor in People award!

  • rate this

    Comment number 423.

    hard lesson for Tesco, USA is a different culture people have shopping habits which are completely different
    Analyst on R4 said Tesco put 'Metros' in LA where superstores in malls get all the business; they should have gone to NY, etc.

  • rate this

    Comment number 422.

    I heard Sir Mike Darrington on BBC R2 today.
    He was Cheif Exec until 2008 and was the driving power behind the success of Greggs.
    He spoke lots of common sense which appears to be contra to the Tesco model, witnessed by the success of the business.
    The main point that I got from the broadcast was - look after your staff and they will in turn look after your customers.
    Tesco need to learn.

  • rate this

    Comment number 421.

    #409 "Planning gain" is bribery by another name.

  • rate this

    Comment number 420.

    Tesco is facing the same problemn as any other UK Company.They have Investors.How does any company keep Investors happy?
    An ever increasing Dividend?An ever increasing Share Price?Both?
    Investors are never happy with what they have.They want more...
    Solution....Fire the men at the top.....If that does not work..sell the company to the highest bidder.Walk away...Investors not to blame...

  • rate this

    Comment number 419.

    Never mind: Spring is here.

    All thoughts of triple dip depressions can/will be put down to the meteorological office not predicting the cold spell properly.

    And Gideon's economic model is still correct even though his mentors Reinhart and Rogoff were shown to be wrong.
    His model was simply Margaret's you see.
    Must be right.
    Got that?
    Got that?
    Got that?

    Got to be right. Yeah. Right...

  • rate this

    Comment number 418.

    348. Besford
    Tesco was a British success story from the perspective of shareholders I dont think the public view it the same way. ASDA is part of the US Wal-Mart and Sainsbury has Arabic money invested in it but they all have something in common the destruction of diversity & choice. I dont think Tesco EBITDA is 20% more like 8%.

  • rate this

    Comment number 417.

    Tesco wanted to rule the high street and out of town killing diversity (so do the other large supermarkets) the choice is destroyed as is the real quality we bought meat from a butcher in Devon recently far better than Tesco but where we live all the butchers have been driven out of business.
    We have started to use farmers markets better for the community.

  • rate this

    Comment number 416.

    In our area where the store is a badly converted Factory on an industrial estate, Tesco is not doing as well as, surprisingly, the local Morrison's. The range of free range food available at Tesco is lamentable. It does seem as if they now take customers for granted and have little respect for them. We now only use it late at night if we have run out of something

  • rate this

    Comment number 415.

    With the US economy starting to recover, is it really the right time for Tesco to be withdrawing from the US market. Seems premature to me especially with the huge write down they are taking!

  • rate this

    Comment number 414.

    Frankly I hope the other supermarkets follow suit. I remember when they had to compete with the high street. We had an amazing choice of fresh goods then.

    Since they put them out of business the fresh stuff is cut year on year as the next gen are trained to eat the prepared cr@p.

    Now I must drive 6 miles to the butcher, get my veg from Riverford farm and only eat bread in France

  • rate this

    Comment number 413.

    Will Tesco's be deposed as retail king? I'm afraid without doubt the best 2 retailer in the UK are John Lewis and Waitrose, who operate under a completely different philosophy. Our local John Lewis has customers waiting at the tills to pay before they are even open!
    Tesco's are just Walmart-Lite, initially offering you a choice, but eventually little choice.

  • rate this

    Comment number 412.

    It would seem that the current Tesco management are clearing the decks for action rather than continue to indulge in the fantasies of previous managers. Lots of write-downs this year with a rolling up of sleeves since last summer.

    There is still a long way to go but they need more active store management with a commitment to customer service rather than kissing up and kicking down.

  • rate this

    Comment number 411.

    hard lesson for Tesco, USA is a different culture people have shopping habits which are completely different to the UK and Americans tend to be loyal to one particular store.
    The word I would use is arrogance , you came in all guns blazing and ended up shooting yourself in the foot before the gun came out of the holster.
    A lot more research before you do this type of thing next time.

  • rate this

    Comment number 410.

    The supermarkets are the new high street ie tell me what services you cannot get in a supermarket. Plus yep Tesco made a mistake in the US but I think this is a hangover from what i call the credit years and not what everybody thought as the wonder years. One thing for sure there will be a lot of this from companies like Tesco that for me only has highlighted bloated and poor management

  • rate this

    Comment number 409.

    Our council said 'Of course you can have permission... just demolish and rebuild a brand new swimming baths and leisure centre and redevelop the roadways around the centre and you can have your superstore'. I know of similar deal that involved building a new library and communuty centre. I know it's technically our money in the first place but the council weren't building them!

  • rate this

    Comment number 408.

    It is time to scrap Tax Credits and instead just raise the Minimum Wage significantly - for all the small businesses it could hurt thre's many more jobs in mulit nationals who pay no or little tax here despite their massive profits......

    ....time for the higher rate payers to stop SUBSIDISING cra wages that leave people needing Housing Benefit & other welfare pay outs.....

  • rate this

    Comment number 407.

    I note the Tesco failure in U S, and am sad to see it. Their aggressive marketing in U K is what kept the others on thier toes. I wonder mr clarke, could you purchase a N Z busness here, The warehouse. 80 plus stores await your arrival,. We hav 2 supermarket groups here, who treat the customer with disdain. How we need a 3rd challenger here. ICome on down tesco!

  • rate this

    Comment number 406.

    @372 mainsail67
    Interesting. M&S used to seek to sell out of (a majority) of food by 3pm each day. Don't know how much power individual mamagers might have to vary that policy.

    Agree w/you that monitoring sales is important & extending that sell-off time would obviously pay if customers were coming in to buy & finding shelves empty. Assuming managers had that freedom from HQ, of course.


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