Tesco 2009 Annual Report Download - page 12

10 REPORT OF THE DIRECTORS
Tesco PLC Annual Report and Financial Statements 2009
In most of our markets we are now amongst the largest, most profitable
and fastest growing businesses – and this is a good platform from
which to make further progress, even in tough times. Our experience
in Hungary of trading profitably and growing well during an already
prolonged recession which began in 2006, also gives us confidence
that by applying what we have learned there in our other markets, the
business can perform well through the current environment.
Europe – including Ireland, Turkey and the four Central European
countries – and the Western US have seen the most marked effects
of the economic downturn although more recently, as the export-led
economies of Asia – particularly South Korea and China – have also
slowed, trading conditions there too have deteriorated.
In Europe, these challenges have been joined by the consequences of
substantial exchange rate movements between the Euro or Euro-linked
currencies and other currencies within the European Union. These
movements have encouraged very significant increases in cross-border
shopping by consumers in several regions – the clearest examples
being Ireland into Northern Ireland, Czech Republic into Germany and
Slovakia into Poland. Our stores located close to these borders have
seen material sales impacts as customers take advantage of devalued
currencies and this has affected the rate of sales growth overall in
these markets.
Although in some markets we have moderated our rate of growth in space,
overall we have chosen to sustain strong growth in selling area – and this
will continue. With reductions in site, build and fitting costs for stores –
these have fallen substantially since last year – we are able to use our
capital more efficiently, and this should be helpful to long-term returns.
At the end of February, our operations in Asia and Europe were trading
from 1,911 stores, including 608 hypermarkets, with a total of 55.0m sq ft
of selling space. This year, we plan to open 320 new stores with a total
of 5.4m square feet of sales area in these markets and a further
0.6m sq ft is planned to open in the US.
Asia
We have delivered a strong performance in Asia. This has been achieved
whilst absorbing planned integration costs and initial trading losses
during conversion on the newly-acquired Homever stores in South Korea.
With all the stores now converted to our Homeplus format, we expect
this acquisition to provide a good underpinning to growth in Asia as
a whole in the current year and beyond as we realise the synergies
and scale benefits from the deal. The underlying business in South
Korea delivered solid profit growth and elsewhere in Asia we saw
excellent progress in Malaysia and Thailand, partly offset by a small
trading loss in Japan.
 China, having studied the market carefully and developed our
long-term strategy, we have begun to accelerate store and
infrastructure development in the economically important and
populous coastal provinces, centred on the major cities. Our first
multi-level freehold shopping centre development will open in
Foshun in a few months’ time, with a further three planned in the
current year. Sites have been secured for a further 14. We saw
strong sales, including good like-for-like growth in the year as a
whole – although sales slowed in the final quarter, partly driven
by food price deflation – and we made a modest profit, similar
to last year.
 Japan’s already difficult retail market saw a further sharp
deterioration towards the end of 2008. The new team in Japan is
building on last year’s introduction of the Tesco operating model –
a suite of systems and processes which is being rolled out across
our markets – by strengthening distribution, range and pricing
management. Our strategic focus remains on building a strong
offer for customers in the convenience sector based on Express
and on our Tsurukame small discount supermarket format and
this work is making progress. 13 new stores including six of our
new 24-hour Express stores opened during the year.
 South Korea – which celebrates its tenth anniversary
this year – delivered another very good performance, coping well
with the twin challenges of subdued consumer spending and the
task of integrating the 36 Homever stores which were acquired in
September. Including the acquired stores, 3.9m square feet of space
– an increase of 63% – was opened during the year. Some of last
year’s organic development was deferred whilst we focused on
integrating Homever and our programme of new space this year will
reflect this. The customer response to the conversion of the stores
to Homeplus has been excellent, with sales uplifts on the converted
stores averaging well over 50%. The performance of our Express
stores, which saw sales growth of 64% in the year, has also been
very encouraging.
 Malaysia has had an exceptional year – achieving rapid progress in
sales, profits and returns as it delivers the full benefits of the Makro
acquisition in early 2007. This success, combined with a fast rate of
organic expansion, has enabled us to become market leader in a
country which we entered only in 2001. Although economic growth
has slowed in recent months, our strong market position plus a good
pipeline of seven planned new hypermarkets in the current year,
mean we can extend our lead. Clubcard, which was launched at the
end of 2007, is being very well-received by customers.
 Thailand has delivered strong growth against the
background of sustained political uncertainty and a weakening
economy. Consumer confidence levels are low but our continued
investment in improving our offer for customers has served the
business well and we are continuing to outperform our major
competitors. Our small format stores – particularly Talad
(supermarkets) and Express stores, which are very popular with
customers in the larger cities – have seen very good growth in
both sales and profit.
International continued
Poland
In Poland we have launched the first phase of
our new discount range designed to compete
with local limited range discounters.