Central European profit plunge hits Tesco's recovery drive

Wed Oct 2, 2013 4:23pm EDT
 
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By James Davey and Neil Maidment

LONDON (Reuters) - Plunging profits in mainland Europe blew a new hole in Tesco's recovery plan on Wednesday, piling pressure on the world's No.3 retailer as it struggles to reverse market share losses in its main UK market and extricate itself from other foreign failures.

The grocer said first-half trading profit slumped 68 percent in its European division, made up of the Czech Republic, Hungary, Poland, Slovakia and Turkey as well as Ireland, adding to signs of a slowdown in developing markets after a warning from consumer goods group Unilever (ULVR.L: Quote) (UNc.AS: Quote) on Monday.

That, along with weaker trading in some Asian markets, including previous star-performer Thailand, dragged down Tesco's (TSCO.L: Quote) group profit for a third straight half-year and sent its shares down almost 4 percent as analysts cut forecasts.

"With profits nosediving in Europe and Asia, the foreign markets that once provided a perfect hedge against weak demand at home are now more hurdle than help," said John Ibbotson, director of consultant Retail Vision.

The darling of the retail sector during two decades of uninterrupted earnings growth, Tesco has suffered in recent years from failed attempts to break into the United States and Japan and a costly, still unprofitable, expansion in China.

While it invested abroad, it also neglected Britain, where it still makes over two-thirds of sales, and started losing market share to rivals including Wal-Mart's Asda (WMT.N: Quote) and J Sainsbury (SBRY.L: Quote), as well as discounters Aldi ALDIEI.UL and Lidl LIDUK.UL and upmarket Waitrose JLP.UL.

Despite being 18 months into a 1 billion pound ($1.6 billion) turnaround plan in Britain, which has included revamping stores, recruiting more staff and new product ranges, the group said sales at UK stores open over a year, excluding fuel and VAT sales tax, were flat in the 13 weeks to August 24.

Though that was at the top end of analysts' expectations and an improvement on a 1 percent decline the previous quarter, it was well below the 2.0 percent rise, excluding fuel, reported by Sainsbury for the 16 weeks to September 28.   Continued...

 
A shopper passes a Tesco supermarket in London October 5, 2011. REUTERS/Luke MacGregor