(c) 2013, Bloomberg News.
(c) 2013, Bloomberg News.
LONDON — Tesco, Britain's largest retailer, said first-half earnings declined as European shoppers shunned its supermarkets and the grocer spent more on improving food quality to win back customers at home.
So-called trading profit fell 7.6 percent to 1.59 billion pounds ($2.6 billion), Cheshunt, England-based Tesco said Wednesday. The median estimate of 13 analysts compiled by Bloomberg was 1.62 billion pounds. Operating profit in Europe slid 68 percent.
Tesco shares fell as much as 4.7 percent, the most in four months. While British sales have stagnated amid competition from discounters and rivals such as Waitrose and J Sainsbury Plc, revenue is declining in all the retailer's international markets. In particular, shoppers in Turkey and Ireland were more prudent than some analysts had expected during the first half.
"The Europe number is not good, profitability is pretty poor," said Richard Marwood, who helps oversee more than $700 billion at Axa Investment Managers in London. "It's a little bit early to say run, but the danger in the back of people's minds is that Europe turns into the new U.S."
Tesco agreed to sell most of its Fresh & Easy chain in the U.S. to a company owned by billionaire Ron Burkle last month, ending a failed six-year foray into the world's biggest economy.
Tesco's like-for-like sales fell 5 percent in Europe, as shoppers in Ireland defected to cheaper offerings and Turkish customers shunned the grocer's large-store formats. Losses in Turkey increased "significantly," the company said.
The retailer also struggled in Asia, where operating profit fell 7.4 percent to 314 million pounds amid restrictions on opening hours in South Korea, its main market outside Britain.
Tesco's performance abroad is "raising questions whether management will move to exit other markets" such as Poland and Turkey, John Kershaw, an analyst at Exane BNP Paribas, said in a note previewing today's results. The grocer today said it would pay $558 million to fold its Chinese hypermarkets into a joint venture with China Resources Enterprise Ltd.
Chief Financial Officer Laurie McIlwee insisted that Tesco is committed to all the countries it operates in.
"We have great market positions in the majority of those markets," McIlwee said on a conference call. "We'll fight our way through a difficult macro environment."
Tesco said it expects to show an "improved trading performance" in the second half, noting that investments in Europe are already having an effect after a "challenging retail environment" in the first half. The company repeated its goal of mid-single digit trading profit growth in the medium-term.
British same-store sales, excluding petrol and value-added taxes, were unchanged in the second quarter, matching analyst estimates for that measure. That was an improvement from the 1 percent decline in the first quarter.
After its first profit annual drop in almost two decades last year, Tesco has been investing in improving the quality of its own-brand products and is revamping its hypermarkets with bakeries, gourmet coffee and tapas while adding outlets like Harris & Hoole coffee shops and Giraffe restaurants to the premises to make them more desirable destinations.
Improvements to the domestic food offer have included getting all fresh chicken from U.K. producers, and all beef products from Britain and Ireland, the company said.
Still, shoppers are defecting both to budget competitors like Aldi and higher-end shops such as Waitrose. Tesco's market share fell to 30.2 percent in the 12 weeks ended Sept. 15 from 30.9 percent a year earlier, Kantar Worldpanel said Sept. 25.
Sainsbury, the only one of Britain's four largest grocers to gain market share in that period, said Wednesday it was starting to see "encouraging signs" in key economic indicators.
"With the Tesco ship drifting perilously close to the rocks, Sainsbury's has the wind firmly in its sails," John Ibbotson, director of retail consultant Retail Vision, said in an e-mailed comment.