Like a student nearing the end of their gap year, Tesco has careened across Europe, Asia, even the United States, and is now preparing to return home and settle down.
The supermarket chain, the UK’s largest, is weighing up whether to offload its operations in Hungary, the Czech Republic and Slovakia, with grocery rival Lidl among the interested parties.
This retreat from Europe, which Tesco could confirm when it updates shareholders on Thursday, would bring to an end the grocer’s globetrotting expansion and spell nothing but trouble for its British competitors.
Back in 2007, there was no land the supermarket chain did not think it could conquer. Sir Terry Leahy, who had then been Tesco’s chief executive for a decade, hailed the retailer’s expansion into the US as just one part of a “pretty ambitious” play for global dominance.
The supermarket hoped to generate more than half of its annual revenue from overseas markets within the following decade, nearly double the 27 per cent it achieved at the time.
“We keep looking at everywhere,” Sir Terry told The Times, naming India and even Russia as potential targets. “We are on the threshold of becoming one of the few successful international retailers. There’s plenty to do.”
Fast forward nearly 20 years, and there’s little still to do. With its “central” European operations on the chopping block, Tesco has already withdrawn from France, Japan, Malaysia, Poland, South Korea, Thailand, Turkey and America.
The supermarket quit its US experiment in 2013, selling off all remaining Fresh & Easy stores, and the accounting scandal that nearly sunk the firm accelerated its turn inwards in 2014. Tesco’s Thai and Malaysian operations were sold for £8bn in 2020.
The group’s European division accounted for £4.5bn of its £66.6bn total revenue last year and was recently described by chief executive Ken Murphy as an “integral part of the group”. But the UK’s biggest grocer looks prepared to cut its losses.
European exit ‘logical’ for Tesco
Shareholders would be unlikely to shed any tears if Tesco confirmed this move later this week, analysts said. The supermarket is riding high in the UK, with a market share more than 10 per cent clear of its closest rival, Sainsbury’s.
Nicholas Found, an analyst at Retail Economics, told City AM that a sale of Tesco’s European operations would have “strategic logic at the right price”. “A disposal would simplify the group, sharpen management focus and free up capital for the UK and Ireland, where the potential returns are likely to be greater,” he said.
“The danger is selling a good asset too cheaply. Tesco has no pressing need to exit, so Ken Murphy can afford to be highly disciplined on valuation.”
Though Sainsbury’s appears rock solid in second place by market share, Tesco’s renewed focus on the UK could cause alarm for Asda and Morrisons, who have both struggled with hefty debt piles following private equity takeovers.
Investors will nonetheless hope to see renewed proof that Tesco is adding to its towering market share. The grocer’s shares slipped three per cent in one day in July, when the company revealed sales growth had slowed to just one per cent.
Market share softens
Analysts have blamed Tesco’s recent lack of market share gains on the recoveries of Marks & Spencer Food and Co-op, which were both flailing in the wake of cyber attacks at this time last year.
Tesco’s market share dipped from 28.1 to 27.8 per cent in the three months to September, according to recent figures from Worldpanel by Numerator. Though an improvement from its low of 25.6 per cent in 2020, Tesco’s market share today is far from its 2007 heyday, when it accounted for nearly £1 in every £3 spent at the checkout tills.
Tesco boss Murphy could send investors a further signal of its commitment to the UK market if it confirms its interest in Majestic Wines. Tesco is reportedly weighing up a swoop for the wine retailer, in what would be its first takeover move since it bought wholesaler Booker for £3.7bn in 2017.
Independent retail analyst Richard Hyman said a disposal of Tesco’s European business “clearly makes sense. The gradual divestment of its overseas businesses has allowed it to fully focus on the core domestic business.
“Interestingly, more recent market share has been surprisingly brittle. My view is this is a small blip but they need to reassure [investors] on this and how and why it’s going to return to positive territory soon.”
