City focus: Tesco fires first shots

By RUPERT STEINER FOR THE DAILY MAIL
Updated: 05:06 EST, 16 April 2008

As Tesco tweaks its food and clothing ranges to cash in on the economic slowdown, it will be a case of 'every little helps' for Britain's hard-pressed shoppers.

Dominant position: Tesco is cementing its position with a fresh salvo of discounts and promotions

While the rest of the high street suffers, Tesco, which has been accused by rivals of abusing its dominant position, is about to launch a fresh salvo of discounts, promotions and a resetting of its ranges, which is certain to heap pressure on other chains.

Chief executive Sir Terry Leahy, speaking at yesterday's annual results, said Tesco would profit from the gloom. 'When the economy slows down there is an opportunity,' he said. 'People look to Tesco to help them out - we are a value based brand which you could argue benefits when people are economically stretched. We are skilled at tailoring our cloth to different circumstances.'

He also came out fighting over speculation that last year's expansion into America was faltering. Top of Leahy's basket of good news was a 12% jump in annual profit from £2.6bn to £2.8bn on sales up to £47bn from £42bn.

He also confirmed yesterday's Daily Mail story that Tesco was moving £207m of its property into a joint-venture company with Prudential to raise funds for international expansion.

The annual dividend was increased by 13% to 10.9p per share as the stock rocketed 28½p to 419½p.

Leahy said there had been a strong start to the year with 13% growth in group sales. Underlying sales for the UK are up 4% since the financial year ended in February.

Analyst Philip Dorgan from Panmure said: 'We believe that market conditions will get worse over the next six months, but we expect Tesco to outperform its peers in food and to continue to do so in non food.'

Tesco is one of the few success stories in what has been a miserable few weeks for retailers. The British Retail Consortium reported sales falling by 1.6% for March, the first drop in almost two years.

Many chains suffered from the early Easter and freezing weather, which kept shoppers at home. But if Leahy is to be believed, the sun has shone on Tesco in California.

It has opened 60 of its Fresh & Easy stores which form the launchpad for a wider push into America. Some investors have been worried by negative research from one analyst who reckoned suppliers had indicated the business was running 70% below budget on American sales.

American dream: Tesco's Fresh & Easy stores are a launchpad for a wider push into the US

Leahy said sales are ahead of target, but failed to reveal specific figures: 'Overall I am pleased with the promising start. Whilst it is still early days, the response of customers to our offer has surpassed our expectations with the best stores taking $20 per sq ft per week. Independent research data shows 69% of customers are extremely satisfied.'

He said there was a natural break in the roll out programme which had been seized upon as something significant. 'We are going faster not slower,' he said. 'And we have brought forward the opening of a second depot [distribution centre] in northern California which will give us the capacity in a year to accelerate growth.'

Back in the UK he admitted there would be job cuts at head office in Hertfordshire to save cash. But overall Tesco will create 30,000 jobs globally over the next year, with 10,000 of them in the UK.

Tesco has also embarked on a number of green initiatives. The green Clubcard scheme has reduced carrier bag use by over one billion and the retailer is shipping wine around the UK by canal boat.

Customers can expect to see food and clothing with labels measuring their carbon footprint and in the autumn Tesco Digital will launch a rival to iTunes, enabling music downloads.

The share volley seems an age away from last month's spate of bad news when a stream of senior managers had departed to rivals, the UK business had lost ground to rivals, and its online clothing trial had been withdrawn.

Other retailers will take solace that even the Tesco juggernaut can be affected by speed humps on the road to growth.