Tesco has become the first UK retailer to break the £2bn profit barrier. But that’s just the start of its ambitions. Simon Mowbray reports

Tuesday morning started as we all knew it would: Tesco announced record full-year results, becoming the first British retailer to smash through the £2bn profit barrier; chief executive Sir Terry Leahy appeared on radio and TV news bulletins explaining that the chain owed its success to nothing but the fact that it was giving customers what they wanted and, in any case, no one was forcing them to shop there; pressure groups representing the great and good from the independent retail sector rushed out press releases containing emotive phrases such as ‘concern about the concentration of buying power’ and ‘questions about growing dominance’ (the Forum of Private Business even went so far as to suggest that Tesco had become “a Frankenstein’s monster driven by greed which bullies suppliers and creates a culture of fear”).
Meanwhile, radio phone-ins throughout the country asked callers to debate (once again) whether Tesco had become too powerful, although the amount of support for the retailer from satisfied customers will (once again) have made depressing listening for all its rivals, both in the independent and multiple sectors.
However, while Tesco clearly understands that such questions will always be asked, there was this week the first real sign of its annoyance at having to handle them and, in particular, a sense that the retailer now regards such inquiries as trivial in the context of its global aspirations.
As one analyst told The Grocer this week: “It’s a bit like a football club winning the league every year and having to justify why you’re the best team, earn the most money, and so on, when all you want to do is get on with winning the Champions’ League in Europe. Success breeds success: it’s as simple as that, but there appears to be something in the British pysche that just cannot tolerate it. In the meantime, it’s just an annoyance that Tesco can do without as it embarks on the next phase of its plan to become a truly international retail giant.”
Indeed, it is clear that Tesco now has much bigger fish to fry, with Sir Terry this week outlining the company’s plan to become a worldwide force.
Questions about its 30% share of the UK grocery market, prompted by new figures in The Grocer last week, brought terse responses from the Tesco supremo as he pointed out that the retailer no longer sees itself just as a grocer (non-food sales have grown by 17% to £6bn, clothing has rocketed 28%, home entertainment sales are up 20%, stationery, news and magazines have grown by 26% and health and beauty are up 13%).
On the international front, Tesco has had a good year. As the results showed, sales were up 13.1% to £7.6bn, with operating
profit growing to £370m as the retailer said that it was now even beginning to crack tough nuts such as Poland and the Czech Republic. In Asia, sales grew by 12.8% at actual rates and profits were up 24.6%.
Tesco has plans to open 207 new stores this year, adding 5.4 million sq ft of floorspace to its portfolio. In the last year, it opened 98 stores, adding a combined 3.1 million sq ft.
“The emergence of international retailing will take a long time,” insists Sir Terry. “This is still a local industry, but the balance is slowly changing. I believe Tesco can play a leading role and we have built our experience into our strategy.” However, Sir Terry is quick to warn shareholders not to expect overnight success, undoubtedly only too aware that this is a precarious path trodden (and then retraced) by others before, notably Marks and Spencer, which unveiled a 4.9% fall in underlying sales for its fourth quarter.
Flexibility will be the key as Tesco flies the flag for Britain, claims Sir Terry. “Each market is unique, and an international business can only succeed if it is built on the best local operations. To be the leading local brand is a long-term effort; it is decades of work, not just a land grab in order to plant flags. People, systems and processes will determine who wins and loses. It’s about skill, not scale.”
Things are going well, claims Sir Terry, with first-quarter trading (some international divisions run to a different financial calendar) showing like-for-like sales growth of 5.5%.
However, if anyone thinks Tesco’s international aspirations could see it taking its eye off the ball back home, they should think again. The retailer’s results this week showed that it added 1.2 million sq ft of floorspace last year, partly through extensions to existing stores, as it consolidated its total store numbers across all formats from 1,877 to 1,779 and opened its 100th Extra hypermarket. According to ACNielsen, hypermarkets are currently driving the grocery retail market with sales up 9% in such stores compared with sales growth of just 2.6% for the market as a whole.
Tesco plans to open up to 20 new Extras a year, mostly through extensions to existing superstores. “Still less than 20% of the UK population has access to an Extra store, so there is much more scope,” says Sir Terry. Sixty new Express stores are also planned this year.
Sir Terry also highlighted Tesco’s non-food offer as a key growth opportunity in the UK. It has one million telecoms customers through its broadband internet access and mobile phone deals, and Tesco Personal Finance profits soared 26.5% in the past year to £202m.
Clive Black, head of research at Shore Capital, sums up analysts’ opinions: “Tesco stands apart from its major competitors in short, medium and long-term capabilities. It has considerably exceeded even its own expectations in the past 10 years.”