Tesco tight-lipped on plan to quit US business in £1bn write-down
A Tesco spokeswoman told FoodManufacture.co.uk: “We made clear our intention to launch a strategic review of the Fresh & Easy business some time ago. We have no further comment to make until the publication of our full-year results on April 17.”
Jon Copestake, retail analyst at The Economist Intelligence Unit, told FoodManufacture.co.uk that, if true, “The big question was why had it taken Tesco so long to reach the decision – to find the courage to cut its losses and go.”
The Fresh & Easy business had recorded six years of losses and was forecast to show a profit by 2012–2013. But that was clearly not going to happen, said Copestake.
“The US is one of the most challenging markets to enter and, with the world’s highest per capital consumer spend, also one of the most tempting,” he said. “It’s a very mature market with domestic incumbent companies in place, which the market will favour.”
While investing in the market was important, brand differentiation was key and that’s difficult in the US, he said.
Another challenge for UK firms in the US was the fragmented nature of the market. “Walmart has a national presence but many retailers have regional presences – on the west coast [like Fresh & Easy] or the east coast. UK firms think in terms of UK scale but obviously the US market is on a much larger scale.”
‘Expensive transitory period’
Copestake added that the £1bn estimated write-down cost of Tesco’s Fresh & Easy withdrawal highlights “an expensive transitory period” for the retailer abroad.
“Tesco paid Aeon £40M to offload its Japanese operations last June and this gives another, more substantial, blow to a bottom line already struggling with domestic share,” said Copestake. “However, the decision to finally jettison Fresh & Easy, which hasn’t turned a profit in six years of operating, should be welcomed as a positive, if belated, step. The exit cost looks high, but Fresh & Easy has already racked up an estimated £850M in cumulative losses, with observers wondering why the current decision was not taken years ago.”
Tesco boss Philip Clarke was working on the sale of the Fresh & Easy business – with Aldi a potential buyer – followed by a piecemeal sale of the assets, according to one report in The Daily Telegraph.
‘Cash costs from exit’
Shore Capital analysts Clive Black and Darren Shirley said such an outcome would be unsurprising: “We expect a considerable asset write-down of Fresh & Easy, albeit our greater area of interest is the cash costs from exit, which we estimate at about £250M.”
But the range around that figure could be considerable depending upon store disposals, the sale of the Riverside distribution centre and three food factories, alongside the closure of the Los Angeles head office, they added.
“While a blow to the balance sheet and reputation of Tesco, we see this as a story of the prior management rather than the present team,” continued Black and Shirley. “Additionally, although a growth stream is not going to emerge as previously thought in North America, Tesco’s earnings per share will benefit in the near-term from the removal of the drag of US losses.”
Black and Shirley said: “Philip Clarke deserved credit for his decision to withdraw from the USA and try to focus upon making the most from a business that retains strong cash generative capabilities, a strong balance sheet and leading market positions in most of its territories.”
