Tesco is to bring down the curtain on its overseas adventures, with bankers exploring the sale of its operations in central Europe.
So reported the Financial Times last week, suggesting that after a chequered history of expansion in Europe, Asia and the US, the UK’s biggest supermarket wants to concentrate on growing its domestic domination.
But what would a sale of Tesco’s remaining overseas assets mean for the fight for shoppers at home? And do experts think it is the right move?
Tesco is believed to have hired advisers to run the rule over a sale of its chain of stores in Hungary, the Czech Republic and Slovakia – the remaining outposts, outside the UK and Ireland, for Tesco following a string of deals to exit the US, Asia and other areas of Europe over 13 years.
Tesco’s then CEO Philip Clarke memorably withdrew from the US in 2013 following a failed attempt, instigated by Terry Leahy, to blaze an international trail with Fresh & Easy.
But it was Clarke’s successor Dave Lewis who signalled full-scale retreat in 2015 as part of his turnaround strategy following the accounting scandal of the previous year.
Lewis’ successful Project Reset has since been consolidated under Ken Murphy, with Tesco taking advantage and contributing to the woes of rivals such as Asda and Morrisons despite the strong discounter challenge.
It’s just over a year since The Grocer revealed Tesco UK CEO Ashwin Prasad told suppliers it was targeting a return to a share of more than 30% of the UK grocery market for the first time in 12 years, and in December last year it recorded its highest share in more than a decade. Yet its latest share of 28.5% as of its first quarter results last month came with UK sales growth slowing as it lapped last year’s impressive figures.
Sources familiar with Tesco’s foreign operations say it therefore makes perfect sense to look to free up resources and simplify its strategy still further, with the only surprise it has taken Murphy so long to pull the trigger.
“Tesco was reviewing selling Its central Europe operations over a decade ago as part of a more general retreat as a global retailer enabling it to focus resources on the UK,” says one leading source close to the operations.
“But while the timing was good in 2018-2020, the value would have been poor. I suspect they are just finishing the job but now with slightly better returns.
The source adds that the slow growth of Tesco operations in those countries has become a hindrance for a Tesco’s leadership, which has shown a ruthless pursuit of its proven strategy for success in its heartland. Just last week the supermarket was again crowned UK Grocer of the Year at the Grocer Gold Awards.
“The CE business unit, whilst scaled, with 500 stores and circa 22,000 colleagues, makes a poor return in the Tesco world,” adds the source. “Its low returns in a high-return UK business will have a drag on the overall business.
“If the latest data is showing core business slowing down in the UK they can ill afford more drag. It’s taken an awfully long time to turn this business around, the pace of change will be frustrating to Ken and Tesco CFO Imran Nawaz.
“A sale will ultimately mean that it can invest back into UK and Ireland and invest in innovation and digital platforms to drive much higher returns.
“Tesco will be looking to drive Clubcard personalised prices and offers at scale and exiting CE will ultimately help it fight on price but in a targeted and considered way.
Tesco’s retreat from Europe comes as it had been adding to the business closer to home.
“The board have been quietly securing complimentary businesses in the UK and Ireland,” adds the source. “We’ve seen Tesco move for Joyce’s in Ireland, Best Food Logistics, Venus, Shoprite.
“All of which secures share within the core business albeit small-scale acquisitions. This could give them some extra firepower – albeit I suspect a better return will be a further pregame of share buybacks.
“Investors like the progress on the UK model, with new income streams versus CE which is highly regulated, very price-sensitive and lacks the firepower of the UK both in resources and capabilities.
“The Tesco brand has strong brand equity amongst its peers globally, so even a low-multiple disposal can still be value-accretive if it’s dragging down the group’s overall rating.”
Alex Rowberry, senior insight analyst at IGD, notes that Tesco’s European stores contributed less than 4% of its adjusted operating profit of £3.15bn during the past financial year and says it is simply not where the growth lies.
“The common theme is focus,” he says. “Growth opportunities are increasingly centred on food, Clubcard, retail media, online grocery, Whoosh rapid delivery, and digital services rather than geographic expansion.
“Tesco has also become more selective within its core business. General merchandise has received less strategic emphasis as Tesco has increased its focus on food. Its decision to move to a commission-based partnership with The Entertainer for toy retailing is another example of a capital-light approach that allows Tesco to offer a wider proposition while focusing resources on its core grocery offer. Viewed through this lens, central Europe increasingly appears to sit outside Tesco’s future priorities.”
AJ Bell head of markets Dan Coatsworth says “Tesco has put its heart and soul into defending its UK market-leading position and everything else plays second fiddle.
“Part of the strategy has been to retreat from non-core operations such as financial services, and reducing its international presence would also make sense. Tesco’s mainland European arm has washed its face but isn’t strategically significant. Losing it from the group would be a simple cleaning up exercise rather than something that moves the needle.”
One retail consultant source says Tesco’s move is unlikely to be too directly linked to its ambitions in the UK. “Tesco is not doing this because of slowdown.
“This is something Dave Lewis would have sold off if he could. There just wasn’t any appetite from potential buyers when he tried.
“Central Europe, of all of the geographies Tesco operated in, is actually a fine business, so there was no real need to get rid of it.”
He adds Tesco may have just as much trouble securing a sale today.
“Central Europe is not a terrible asset, so Tesco will want a good price for it, but the trouble is no one is willing to meet that price. If you look at the market, the problem is the stores are big format supermarkets and hypermarkets, and those markets are broadly led by the discounters, so it isn’t clear who there is to consolidate that bigger end.”
A City dealmaker reckons the central Europe business would have a price tag of between £750m and £1bn attached.
But Bernstein analyst William Woods notes Tesco would be unlikely to earmark any returns for investment in the UK stores.
“Tesco would likely plough the vast majority of anything from a sale into another share buyback for investors,” he says. “The group doesn’t need to invest much more into the UK, mainly because it can do that using its own margin. Investors would want it to come back as a buyback, which is what happened when they sold the banking business to Barclays in 2024.”
Ged Futter, founder of The Retail Mind, says despite the speculation, one thing is certain: Tesco will not be acting because of any short-term blip in its figures.
“This will have been part of a plan, not a kneejerk reaction to slower sales growth.
“But it also fits with their relentless pursuit of growth in their strongest market and if they want to win on that market share and get up to 30% you have to have cash.
“Tesco knows that it has its opposition on the ropes. They have got their fingers burnt in the past with global expansion but now their battles are all about winning at home.”
Tesco’s foreign retreat
2013: Tesco announces exit from US, costing around £1bn including paying US billionaire Ron Burkle £80m to take on loss-making Fresh & Easy chain.
2015: Tesco agrees to sell its South Korean retail arm Homeplus to a consortium led by MBK Partners for £4.24bn
2016: Tesco retreats from Turkey after selling its controlling stake in Turkish chain Kipa to rival Migros.
2020: The supermarket finalises the sale of its Thailand and Malaysia business, marking the end of a new ambition Asian expansion
2020: Tesco sells its 300 Polish stores to Danish retailer Salling Group.
2020: £275m deal marked the final withdrawal of its Chinese operations, originally formed in a 2014 merger with China Resources
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