Tesco gave its third quarter update this morning, with the big news being its decision to announce a review of the Fresh & Easy business, with a view to exiting the US.
Fresh & Easy
Although Fresh & Easy was continuing to make steps in the right direction, it was not progressing fast enough for Phil Clarke. While this may not have been a problem if the UK and other international divisions were still flying, with growth elsewhere slowing, a tough decision needed to be made; and ultimately the investment this frees up can have a bigger impact elsewhere.
Tesco did huge amounts of research into the US, but changing conditions on the ground made its task much harder and many of its ideas for shaking up the market the Americans were just not ready for, such as private label foods and smaller, more functional stores. Moreover, while predecessor Terry Leahy had more of a personal commitment to Fresh & Easy, for Clarke it has merely been an expensive distraction that he somewhat reluctantly inherited.
The move also sees yet another senior departure from the business, in the form of Tim Mason. Mason is the latest in a number of well-respected, experienced operators to leave the business in recent years and while this may strengthen Clarke’s authority it is not necessarily good news for the company.
UK performance was mixed, with food showing more signs of recovery, at least in the short term, but general merchandise continuing to present a real conundrum. Indeed, while UK food LFLs grew 1.2%, overall UK LFLS fell 0.6%, indicating massive declines in non-food.
The stronger performance in food can be attributed to a number of improvements to the offer, including a renewed focus on price, overhauls of stores and a refreshing of products including 1,200 additional new or improved own-label items. By striking a better balance between value and quality/experience, Tesco has been able to take the fight back to the likes of Morrison and Asda in particular.
However, general merchandise, once the engine of the business, remains stalled. Whereas the difficulty was once trying to fit as much product as possible into stores and watching it grow, in the present environment it’s about making difficult decisions over what categories still offer potential.
Clothing, nursery and home are all areas Tesco is confident it can use its own label brands and value credentials to deliver a better performance. But it is making the decision to pull back from once lucrative areas such as consumer electronics and home entertainment, where the growth of the internet and fierce competition is making it harder to stand out.