Tesco pays the price for its optimism in US market

Thumb_richard-edgar
Tesco has announced the first drop in profits for two decades
Tesco has announced the first drop in profits for two decades Photo: Tim Ireland/PA Wire/Press Association Images

"Go West, young man!" was the cry in nineteenth-century America to seek riches in the new states like California. The optimism with which Tesco headed the same way in the twenty-first-century has proven to be misplaced.

Today, Tesco has finally admitted defeat on its American adventure with the announcement that it is to close the Fresh & Easy supermarket chain which it set up initially in California, Nevada and Arizona in 2007.

"At the time," writes Tesco's chief executive Philip Clarke in a long blog on the company's website, "the three states we were in ... were the fastest growing in the US. Two years later, they were the worst performing, having been hit hard by the sub-prime mortgage crisis."

Analysts say the venture was misguided as Tesco rejected the safer option of buying an existing chain and expanding it in favour of the bolder gamble of starting an entirely new one. Unfortunately it is harder than it appeared to understand the minds of American consumers.

Mr Clarke is having to write off a billion pounds to close Fresh & Easy. It has also cost about the same in lost profits over the years as Tesco invested heavily in building up the chain.

A branch of Fresh & Easy - Tesco's American venture
A branch of Fresh & Easy - Tesco's American venture Credit: REUTERS/Fred Prouser

But that is not all.

Tesco has also invested heavily in land in the UK in recent years. These were often big out-of-town plots on which it planned to build superstores like the ones which had powered Tesco to success.

But British shopping habits are changing and many prefer to buy in smaller convenience stores closer to home or even to buy online. Tesco does not need the land any more and is selling over a hundred plots off at a loss. Lower land values mean it is writing down another £804 million.

Finally, expansion in the East has not gone as well as Tesco hoped either. Businesses it bought in Poland, the Czech Republic and Turkey are suffering as the economic crisis spreads through Europe and beyond. The cost? Almost half a billion pounds.

Large out-of-town stores are less relevant today as customers turn to online and local shopping
Large out-of-town stores are less relevant today as customers turn to online and local shopping Credit: Tim Ireland/PA Wire

All told, the various write offs mean Mr Clarke's pre-tax profits for the year are cut from £3.8 billion to £1.96 billion, down 52 per cent on the previous year and the company's first profit fall in two decades. What a curdling drop.

Read: Tesco announces pre-tax profits down 51.5%

Even without these one-off costs, the underlying business is struggling against stiff competition here in the UK and a weak economic climate. In the last three months of its financial year, core sales at British stores grew only half a percent.

A black day indeed. But Mr Clarke appears to hope that this will be a cathartic release - a fresh start after shedding the Fresh & Easy millstone which has been hanging around his neck since he inherited the top job from Sir Terry Leahy in 2011.

Arguably he is having to clear up the mess left by strategies that weren't his in the first place, but some wonder why he waited so long.