Tesco 2008 Annual Report Download - page 12

Tesco PLC Annual Report and
Financial Statements 2008
10 www.tesco.com/annualreport08
Operations, resources and relationships
International operations
The performance of our international businesses has been outstanding –
with excellent progress in sales, profits and returns. The growing strength of
our operations and market positions internationally gives us confidence that
we can deliver further strong progress in the years ahead. Our International
diversification has come of age and, in delivering half of the year’s Group
trading profit growth, it has demonstrated its increased strength and
maturity – with much more to come.
We are seeing the benefits of last year’s acquisitions, and organic growth
in selling space also continues to be rapid as we build out our networks.
We opened a total of 6.2m square feet in Europe and Asia during the year,
an increase of 15%, plus a further 0.5m square feet in the US. Over 60%
of Group sales area is now in International.
At the end of February, our operations in Asia and Europe were trading from
1,561 stores, including 493 hypermarkets, with a total of 45.9m square feet
of selling space. This year, we plan to open 505 new stores with a total of
8.4m square feet of sales area in these markets. A further 1.5m square feet
is planned to open in the US.
Returns – CROI
All our established markets are now profitable and with growing local
scale, increasing store maturity and the benefits of new investment in
supply chain infrastructure, returns from our international operations are
continuing to rise. On a constant currency basis and excluding China, cash
return on investment (CROI*) for International was the same as last year
at 11.5%. This reflects the rise in invested capital linked to our acquisitions
in Poland and the Czech Republic in 2006 and higher capital expenditure.
Like-for-like CROI shows a strong improvement, rising to 13.1% (last year
12.7%), with our lead markets maintaining significantly higher levels
overall. Returns in Turkey and Malaysia have shown pleasing improvement.
In Central Europe, Hungary and Slovakia delivered increases in returns,
while the performance in Poland and the Czech Republic was held back
temporarily by the additional capital linked to our acquisitions in 2006.
Asia We have delivered a very strong performance in Asia, despite retail
markets in our two largest countries – South Korea and Thailand – remaining
subdued. We are now market leader in Malaysia, just seven years after
we entered the country and we are accelerating growth and investment
in China now that we have full control of our business there.
> In China, with majority ownership and full management control of
the business, we have begun to accelerate store and infrastructure
development as part of our long-term strategy to become a leader in
the market. We plan to construct large multi-level freehold shopping
centres, built around Tesco hypermarkets, in the major cities of the
three main economic regions – around Shanghai, Beijing and
Shenzhen/Guangzhou. These regions will each have modern distribution
and supply chain facilities. We now have 56 hypermarkets, mostly around
Shanghai and our first stores in the other regions are trading well. The
first four of our new large developments will be constructed in the current
year. We saw strong sales, including good like-for-like growth in the year
and China made a modest profit.
> The retailing environment in Japan remains difficult. Our small but
profitable business there has continued to focus on refining and
developing the trial Express-type stores, which we began to open last
year – with seven now trading – into an expandable format. We have
strengthened the management team in Japan, invested in infrastructure
and plan a modest new store development programme this year.
* Cash return on investment (CROI) is measured as earnings before interest, tax, depreciation
and amortisation, expressed as a percentage of net invested capital.
> Homeplus in South Korea delivered another excellent performance in
the year; overcoming the challenges of stronger competitors and subdued
consumer spending and achieving solid sales and strong profit growth.
Over 1 million square feet of space was opened during the year and we
have a strong programme of 76 new stores and 1.4m square feet this
year. We will almost double the size of our Express business in 2008/9
to around 130 stores. Our grocery dotcom operation in South Korea is
now well-established and growing rapidly – with sales up by more than
125% in the year.
>Tesco Malaysia has made rapid progress, successfully integrating and
converting the Makro stores and at the same time sustaining very strong
like-for-like growth and moving into profitability for the first time. Six
major refits to the Makro stores to introduce the new Extra format, which
was developed specifically for these sites, are complete and the stores
are trading very well. We have recently become market leader, and with
two more converted stores to be relaunched soon, plus a strong pipeline
of eight planned new hypermarkets, we hope to extend our lead this year.
> Tesco Lotus in Thailand has performed very well. Although consumer
confidence levels remain subdued, our investment in improving our offer
for customers through the political and economic instability of the last
18 months has served us well. Our business has achieved good sales
and profit growth and strengthened its already robust market position.
The successful development and rollout of our formats has picked up
pace again with 106 stores opening with 1.4m square feet of selling
area. This included the opening of ten hypermarkets in the final quarter
of the year.
Europe Our European growth has been stronger than for many years,
helped in part by favourable exchange rate movements. In Central
Europe we are emerging from a long period of economic instability
and intense competition as one of the clear winners across the region –
and the prospects for improving returns as we continue to build our market
positions, and benefit from increased scale, regional economies and
improved infrastructure, have never been better. 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. Our business in
Ireland has also made excellent progress and we are increasingly confident
about the scale of opportunity for Tesco in Turkey as we build on the
excellent Kipa brand, which has already proven itself capable of trading
well across much of the country.
> In the Czech Republic, the benefits of our improved market position –
we are now among the leaders – and stability following the very
successful acquisition and integration of the Carrefour stores last year are
starting to come through well. The performance of the acquired stores
has been excellent – with second year like-for-like sales growth of 11%.
Our first Express stores have also 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.
> The economic background in Hungary is showing early signs of
improvement although the consumer environment remains challenging.
However, our strategy of investing hard to build on our already strong
market position by lowering prices and expanding our store network is
yielding good results. We have seen improving performance from our
stores, including a resumption of like-for-like sales growth last summer,
renewed profit growth and a significant improvement in returns.
Our new store opening programme delivered a 12% increase in our
space – through four large hypermarkets, five of our 3k compact format,
12 1k stores and one Express.
Business Review continued