Tesco 2009 Annual Report Download - page 13

11
REPORT OF THE DIRECTORS
Tesco PLC Annual Report and Financial Statements 2009
Europe
Our European growth for the year as a whole has been strong, helped
overall by favourable exchange rate movements. During the second
half, the effects of the global economic slowdown have been felt in all
of our markets – reflected in slowing GDP growth and deteriorating
consumer confidence and spending levels.
Inevitably, our businesses have been impacted, resulting in slower
growth in sales and profit at constant exchange rates from last autumn
onwards. Whilst our food and grocery categories have remained robust
– and we have seen excellent market share performances across our
markets – non-food sales, principally of hardlines, have been subdued
and this has held back hypermarket growth in particular. Our multi-
format approach has helped to mitigate this and we have seen very
good growth in our smaller-format stores, particularly in Central
Europe, and these remain a priority in our expansion plans.
The work we have done on pan-European sourcing of Tesco own-brand
and general merchandise has further strengthened our competitive
position in the region. We have fully launched the equivalent of our UK
‘Discount Brands’ in several markets and customer feedback has been
very encouraging. The performance of Cherokee and F+F clothing in
Europe has also been pleasing and we have taken significant market
share. Overall clothing sales are up 11%, including 6% like-for-like
growth – with children’s garment sales increasing by 43%.
 Czech Republic, levels of consumer demand have been
affected both by the slowdown in the economy and by the increasing
scale of cross-border shopping into neighbouring Germany, driven by
the strength of the Koruna. Despite this, good cost control (offsetting
investment in lower prices, better pay rates and improved service
levels) and continued expansion delivered solid growth in profits
in the year. Our early Express stores have been well-received by
customers in central Prague and we are continuing a programme
of refits – and in some cases major redevelopments – of our
department stores. This included the complete remodelling of our
large department store in Leberec, which was completed last month.
 Hungary has endured a serious economic recession for approaching
three years. However, our strategy of cutting costs and investing in
lowering prices and expanding our store network is continuing to
yield good results and we have been able to sustain profit growth
this year in very challenging circumstances. Like-for-like sales growth
(ex-petrol) was positive and we are outperforming most of our
competitors, with our market share growing to 17%. Our new store
opening programme delivered a 13% increase in our space through
14 large hypermarkets and 12 smaller format stores.
 Poland, our business has delivered a very strong performance,
including robust growth in sales and profits. This was achieved in
the context of competitive trading conditions and significant wage
investment and energy cost inflation during the year. Having
successfully completed the integration of the former Leader Price
stores – where the cumulative sales uplift on conversion is now
approaching 60% – we have resumed faster organic expansion,
with six large new hypermarkets and 12 compact hypermarkets
opened in the year. Overall like-for-like growth was solid, with
small formats seeing stronger growth than hypermarkets. We have
recently introduced a new range of 700 ‘Discount Brand’ products
and these are proving very popular with customers.
 Ireland produced another year of
growth despite the extremely difficult economic climate and trading
conditions have worsened in recent months. A combination of very
tight cost control and more international buying have helped us
invest in lowering prices for customers. These investments have
become even more necessary given the steep rise in cross-border
shopping into Northern Ireland encouraged by the decline in Sterling
relative to the Euro – which has seen an estimated 4% of the total
market move over the border. The benefits of our new distribution
centre at Donabate have delivered substantial efficiencies and
improved stock management, and we have also seen a strong
performance from our new stores.
 Slovakia we saw excellent growth, although the adoption of the
Euro in January 2009 gave rise to conversion costs and, given the
weakening currencies relative to the Euro in bordering countries,
we saw the emergence of cross-border shopping towards the end of
the year. This has impacted sales in recent months. From our strong
market-leading position, and with an excellent and growing network
of multi-format stores, we have coped well with the tougher market
conditions and achieved good market share gains.
 Turkey, Kipa, which is one of our smallest but fastest-growing
businesses, has seen strong sales, driven by the growth of new space,
but pressure on margins resulting from the sharp contraction in the
economy and consumer demand during recent months. We are
continuing to see growth in share in a very fragmented market but
given the severity of the downturn in Turkey, we have decided
to slow our rate of expansion for the time being. Turkey remains
an important strategic longer-term opportunity for us as a large,
growing and relatively underdeveloped retail market.
United States
Fresh & Easy has made good progress. We are now trading from
115 stores and the early openings have moved strongly into like-for-like
growth. Whilst it is still early days, and the economic environment into
which we originally launched the business has markedly changed,
customers’ very positive feedback on our offer has continued to surpass
our expectations. Research confirms that they love the quality and
freshness of our ranges, as well as the prices and the convenient
locations of the stores.
The normal process of adapting a new format to fully meet the needs
of customers locally has resulted in some changes to the product
ranges, the introduction of a limited number of promotions and special
offers, as well as improvements to the ambience of the stores. These
changes have been well-received and consequently we are seeing very
strong growth in customer numbers per store.
Given the scale of the economic downturn, particularly in Las Vegas,
Phoenix and the Inland Empire region of California, we are also
seeing increased demand from customers looking to make stretched
household budgets go further – through more affordable products,
larger pack sizes and additional range in some categories, such as
grocery and frozen food. We are looking to meet these needs by
making further changes to the stores.
As previously announced, we are taking a more cautious approach to
expansion by maintaining instead of accelerating the rate of new store
opening, until economic conditions start to improve in the Western
states in which we operate. We opened 62 new stores in the year with
0.6m square feet of selling space and we expect to open a similar
number during the current year, mostly in the second half.
Last April, with our Preliminary Results, we said that initial US trading
losses would total around £100m in the 2008/9 financial year.
US trading losses in 2008/9 were higher than expected, at £142m,
principally as a result of the adverse movement in the Dollar: Sterling
exchange rate during the second half and higher overhead costs linked
to our more prudent rate of new store opening. We expect a similar loss
in the current year.
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