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Tesco is quitting the world’s two largest economies, but it’s not even secure on home turf

October 2, 2013
October 2, 2013

Supermarkets are a volume business. It was Jack Cohen, the founder of British retail giant Tesco, who coined the oft-repeated mantra “pile it high and sell it cheap”. Today, Tesco reported a weak set of results for the first half of its fiscal year and, more significantly, quit the world’s two largest economies: the US and China. (It gave up on Japan, the third-largest, last year.)

In September, Tesco finally called time on its US venture, paying an investor group to take the money-losing operation off its hands. Today’s are the first financial results to acknowledge that, but the big news was confirmation that Tesco will offload most of its stake in China to the parent company of the country’s Vanguard supermarkets. Tesco will inject £345 million ($560 million) into the new venture, in which it will maintain a passive 20% stake. In all, Tesco’s discontinued operations represented just over £1 billion in sales in its fiscal first half, saddling the group with a net loss of £317 million. Tesco reported a 24% fall in overall pre-tax profits for the period.

Tesco’s chief executive, Philip Clarke, put a brave face on the moves as “evidence of our commitment to disciplined international growth” (translation: to not throwing more money down the drain). But while pulling out of big, saturated markets might be shrewd, it leaves Tesco even more dependent on the UK, which now accounts for 69% of its sales. Operating profits in the UK were up by only 1.5% in the first half, and like-for-like sales at the group’s British outlets fell by 0.5%. Smaller rival Sainsbury’s reported a 2% rise in UK like-for-sales today, suggesting that it is taking market share from Tesco.

Tesco’s remaining international operations are hardly picking up the slack. Trading profits in Asia (now excluding China) fell by 7% in the first half. Profits in Europe, which includes Ireland and a host of eastern countries, plunged by 68% over the same period, with Turkey a particularly weak point, Tesco said. The company is cutting back significantly on new stores in Europe, adding only a quarter as much space in the region as it did last year.

The impression from Tesco’s latest results is one of a company in retreat. Having scrapped expensive, unsuccessful ventures in otherwise large and promising retail markets, it is regrouping on its home turf. But this is now also hostile terrain. If the British retailer’s model fails to woo foreign shoppers, that is understandable, but if it’s losing the shoppers it knows best—Cohen founded the firm in 1919—that’s much more worrying.

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