Tesco 2007 Annual Report Download - page 12

10 Tesco PLC Annual report and financial statements 2007 Find out more at www.tesco.com/corporate
Operating and financial review continued
Operations, resources and relationships
We have continued to make good progress with all four parts
of our strategy:
• grow the core UK business
• become a successful international retailer
• be as strong in non-food as in food, and
• develop retailing services
We have done this by keeping our focus on trying to improve
what we do for customers. We try to make their shopping
experience as easy as possible, lower prices where we can to
help them spend less, give them more choice about how they
shop – in small stores, large stores or on-line, and seek to bring
simplicity and value to sometimes complicated markets.
International Despite challenging economic conditions and
political uncertainty in some of our markets, our international
businesses delivered another good performance. Sales growth
has been strong – with like-for-like growth in all but one of our
markets (Hungary being the exception) and profits have again
moved ahead well. Margins continue to improve, despite
absorbing significant integration costs from the in-market
acquisitions we have completed in the year – in the Czech
Republic, Poland and Malaysia.
We are building-out our store networks more rapidly in existing
markets – through a combination of strong organic growth and
acquisitions. 484 stores, with 8.2m sq ft of selling area, were
opened during the year, including 76 hypermarkets. This is
four times the amount of new space opened in the UK. In Rest
of Europe we opened over 4.7m sq ft of space and in Asia
3.5m sq ft.
These numbers included the acquisition of:
• 11 Carrefour stores in the Czech Republic in May 2006 as
part of the asset swap deal announced in September 2005,
plus 27 small stores from Edeka in April, which together
added 1.2m sq ft – or 45% to our space there.
• 146 Leader Price stores in Poland in December, which
added a total of 1.4m sq ft – the equivalent of 29% of
the existing sales area.
• Eight large Makro stores in Malaysia in January, which
added 0.9m sq ft of sales area, nearly doubling our
space in the market.
We are keen to participate further in the process of
consolidation which is now taking place in many International
markets but we are selective purchasers of assets or businesses.
At the end of February, our international operations were
trading from 1,275 stores, including 411 hypermarkets, with a
total of 40.4m sq ft of selling space. Nearly 60% of Group sales
area is now in International. Excluding the United States, we
expect to open 442 new stores in our International markets
during the current year, adding 7.6m sq ft of selling area.
Returns – CROI* All our established markets are now
profitable and with growing local scale, increasing store
maturity and the benefits of investment in central distribution
now flowing, returns from our International operations are
continuing to rise. On a constant currency basis, cash return
on investment (CROI*) for International has increased again
– to 11.5% with our lead markets overall maintaining
significantly higher levels.
Asia
• In China we trade from 47 hypermarkets, mainly in
Shanghai, and the first stores in China’s other large
regional markets – Guangzhou, Shenzhen and Beijing
(our first Tesco-fascia store) have opened well. Our new
range of over 1,000 Tesco own brand lines have been
well-received by customers. Hymall’s sales have continued
to grow strongly – up overall by 19% in the year, with
strengthening like-for-like sales as the year progressed.
As a result of carrying higher overheads as we invest to
equip the business to grow faster, it made a small loss
after tax and interest, of which our share was £6m.
• In a still subdued retail market in Japan we made progress,
with modest overall sales growth and a stronger like-for-like
performance. Our focus in the year has been on refining
and developing the trial Express-type stores into a
profitable, expandable format and implementing our
‘Tesco in a Box’ suite of operating systems successfully.
We now plan to push on with a much larger opening
programme of up to 35 new stores this year.
• In Korea, Homeplus continued to do well, with solid sales
and very strong profit growth in more challenging market
conditions than in recent years. During the year we opened
29 new stores and, including extensions, almost 1m sq ft
of space. Most of our new selling area came from large
hypermarkets, but our development programme is now
broadly-based with nearly 20% coming from store
extensions, 21% from compact hypermarkets and the
remainder from the roll-out of our successful Express
convenience format, which now has almost 40 stores
trading. We have a strong forward pipeline of new space,
including plans to double the size of the Express business.
* Cash return on investment (CROI) is measured as earnings before interest, tax,
depreciation and amortisation, expressed as a percentage of net invested capital.