Tesco reports first fall in profits for 18 years

The UK's largest retailer is starting to look vulnerable as half-year profits fall for the first time since 1994.

by Michael Northcott
Last Updated: 19 Aug 2013

For the first time in almost two decades, Tesco has announced that pre-tax profits fell 11.6% to £1.7bn in the half-year to August 25, compared with the same period the previous year. The retail giant claims that the fall is down to its £1bn programme to refurb a huge number of its UK stores, as well as hiring 8,000 extra staff. Despite the profit drop however, like-for-like sales enjoyed a marginal increase (0.1%) in the second quarter, suggesting that the investment programme could still bear fruit. Or veg. Depends which aisle you’re in.

To give Tesco its dues, the refurb scheme has already modernised 230 stores, and several food ranges (namely meat, bakery and frozen food) have been expanded. Group sales are actually up 1.4% for the period to £36bn, so the investment is what has done the damage, rather than poor underlying stats. Tesco’s chief executive, Philip Clarke, said: ‘In April, I set out our plans to 'Build a Better Tesco' in the UK.  We have been hard at work and I am encouraged by our customers’ initial responses to the changes we have made – but there is much more to be done.’ 

Shareholders will probably agree that there’s more to be done. While the UK business gets its expensive overhaul, the American business isn’t doing too well. The ‘Fresh and Easy’ brand, which launched in the US in 2007 to much fanfare, has yet to turn any profit after five years of operation. Ever the stoic, Clarke appears unfazed by this, too. Last month he told the World Retail Congress that the US business is ‘fighting nicely [in] a playground with some very big and very old retailers.’ Then he came over all hyperbolic saying: ‘Already the changes that we’ve been making have gone some way to prove that there’s life in Fresh & Easy yet.’ 

Tell it to the investors, Clarke, because the grass certainly looks greener on Sainsbury’s side of the fence. In a trading update the retailer revealed that for Q2, like-for-like sales were up 1.9%, but including new store openings the rise was 4.4%. Still, Sainsbury’s sales growth may be outpacing Tesco, but it is only the third-largest retailer in the UK and has some serious catching up to do.

For Britain’s biggest retailer, any sign that profits are faltering was always going to be seized upon – many would like to see the juggernaut lose some momentum. The nay-sayers really ought to wait until the full effect of Build a Better Tesco can be felt…

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