Tesco reports drop in full-year profit for second year

Tesco's latest results show the company is in real trouble and make it clear that its position as top dog in the Irish market cannot be taken for granted anymore

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Tesco’s annual profits have fallen for the second year in succession, with a 6% drop in annual profits. This is Ireland and Britain’s largest retailer’s second year of decline, the sharpest quarterly drop recorded during chief executive Philip Clarke’s three year tenure.

Both Tesco’s share price and market share are struggling at near-decade lows. The company has suffered in recent years from failed attempts to break into the United States and Japan, a costly expansion in China and fierce competition in the UK and Irish markets.

The world’s third-biggest retailer showed trading had deteriorated throughout the 12 months, with the key figure of sales at its British stores open over a year, excluding fuel and VAT sales tax, down 3% in the fourth quarter.

In 2012 the British retailer released a profit warning for the first time in two decades. Two years on, and despite Clarke spending billions on improving services and stores, Tesco’s core UK market share has slipped to a near 10-year low.
According to Clarke: "Our results today reflect the challenges we face in a trading environment which is changing more rapidly than ever before. Competition has intensified, particularly at home." 

Irish market 

For the first time, Tesco’s leading position in the Irish market is in danger. While the most recent figures from research group Kantar Worldpanel Ireland revealed that Tesco holds 26% of the market, other retailers are hot on its heels. Since Musgrave rebranded all 24 Superquinn outlets as SuperValu earlier this year, SuperValu has become the country’s second biggest grocery retailer with a 25.2% share and it is possible that it could pass Tesco by the end of the year if sales of its new own-brand range grow as predicted.

Tesco Ireland also faces pressure from the continued rise of the discounters, Aldi and Lidl. The figures from Kantar Worldpanel show Aldi had a 7.9% share of the Irish grocery market in the 12 weeks to March 30, up 21.9% on the same period last year.

Commenting on the results David Gray, retail analyst at Planet Retail, said: "Today’s results show retailing goliath Tesco is still struggling to maintain momentum both at home and abroad. Against a trading backcloth of like-for-like declines around the world, the business has also been beset with a string of management changes, including the planned departure of veteran finance director Laurie McIlwee. Stability among the senior management team is seriously lacking and with waters so choppy, a much firmer hand is needed on the tiller."

Tesco admitted that it had done worse than expected amid increasingly tough competition, saying: "Our performance in the year was not where we had planned it to be."

Challenges will remain

The supermarket warned that the challenging environment would continue in the current financial year. "During the year, we have maintained our focus on cash and capital discipline. We have significantly reduced our new investment in Europe, focusing the majority of our overseas capital on targeted, high-returning investment in Korea, Malaysia and Thailand. We have completed our exit from the U.S and established partnerships with CRE in China and Tata in India, which provide continued access to two of the world’s most exciting markets, consistent with a sustainable level of future investment."
The company also revealed a one-off charge of £801 million mainly relating to a write-down of assets in Europe, as well as a £540 million impairment relating to its Chinese business.

Group trading profit was down 6% to £3.3 billion while statutory profit before tax was up 9.8% to £2.3 billion, reflecting the impact of one-off charges in this year and last year’s results.

The chief executive brushed off speculation about his future amid the continuing decline in performance. He said: "I have got no intention of going anywhere. All my waking hours are spent running Tesco. It’s what I love. I’m going to see this thing through."

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