£1bn rescue for Tesco's UK business

The retail giant has announced plans to invest £1bn in its UK operation to revive flagging profits and stamp on investor disquiet.

by Michael Northcott
Last Updated: 19 Aug 2013

The UK’s largest grocer threw a carrot, and a large one at that, to its shareholders today, announcing a planned investment of £1bn in its UK operation. The chatter surrounding Tesco and its profitability in recent times has included suggestions that the retailer may finally be ceding ground to its ‘aggressively discounting’ rivals.

Some will suspect Tesco is about to engage in a ‘throw money at the problem’ solution however, given that UK pre-tax profits fell 1% to £2.5bn compared with a year ago. The chain is planning to add 20,000 people to its UK work force, renovate stores and introduce better product ranges to wrest back market share in the supermarkets’ price war. 

It seems the company will help fund this investment by a cut in the dividend however: the share price took a nosedive in London this morning after an amendment to the results announced a cut of more than 30% from 14.76p to 10.13p per share. 

UK chief executive Philip Clarke today conceded that ‘Tesco didn’t put enough into the stores and maybe took a little out.’ But the overall group remains in remarkable shape: profits in Asia rose 22% to £737m, and the expansion of its loss-making Fresh and Easy chain in the US will continue despite calls from some investors for Tesco to pull out of the market altogether. The chain has 185 stores stateside and the plan is to add 45 more by February 2013.

By contrast, back in the UK, the chain is reining in its expansion programme to concentrate harder on improving the quality and performance of its existing portfolio of stores. The investment appears to be a clear game plan, and Philip Clarke offered a warning to shareholders: ‘These are decisive steps and this cost investment – as we have already announced – will constrain our near-term profitability.’ This investment needs to bear fruit if bosses want those dissenting voices to subside, but when you’ve got 30% of the market, perhaps there’s only one way to go…

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