Tesco poised to rebuild business after property write-down, claim top retail analysts

Tesco: new network planned

Tesco: addressing oversupply of space

Tesco has reported a £6.4bn loss in the year to end February 2015 after announcing a massive write-down in the value of its stores. But leading retail analysts suggest the update is a reflection of the tough trading environment facing Tesco around the globe and provides the opportunity for Tesco to clean out the closet – writing down property and getting much of the bad news out of the way. This will enable Tesco to focus on turnaround in 2015/16, they claim.

David Gray, retail analyst at Planet Retail, said: “This morning’s news of the biggest loss in decades at Britain’s biggest retailer comes as a result of a writedown on the value of its property portfolio. The simple fact is the value of out-of-town sites has fallen as openings have been mothballed. Although it’s been a disastrous year, Tesco is in effect cleaning out the closet – enabling management to start with a clean slate in 2015/16 upon which to rebuild the business.”

Alastair Lockhart, insight director at retail and shopper marketing agency Savvy, said Tesco’s results made for pretty horrific reading but the loss included one-off charges that reflect a broader revaluation of assets in the context of the new world of grocery retailing.

“Morrisons has already written down the value of its store portfolio and we suggest no major grocery retailer will be totally immune,” he said.

“The reality is that Dave Lewis [chief executive] faced an incredibly tough challenge when he took the helm in September last year. Lewis was quick to make the difficult decision to close 43 loss-making stores – making Tesco the first major retailer to really start addressing the oversupply of space in a slow growing market where online continues to play an increasingly important role.”

As well as closing stores, Tesco will need to find a solution to its ‘over-spaced’ hypermarkets, according to Simon Johnstone, senior analyst, Kantar Retail.

“Creating more collaborative spaces is key, and we expect to see more subletting initiatives to third parties, such as Sports Direct. Downsizing is essential – especially cutting loose any non-profitable aspects of the business,” he said.

Dave Lewis, chief executive, admitted it had been “a very difficult year for Tesco”.

“The results we have published today reflect a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years,” he said. “We have faced into this reality, sought to draw a line under the past and begun to rebuild, and already we are beginning to see early encouraging signs from what we’ve done so far.”

Lewis said Tesco’s renewed focus on availability, service and targeted price reductions, has seen a steady increase in footfall, transactions and volumes. “More customers are buying more things at Tesco,” he said.

Johnstone said the planned investments to increase staff in stores, better availability of products, a simplified product range and a lower and consistent message on price, meant shoppers could soon have a reason to return to Tesco – potentially heralding the revival of the supermarket chain.

“The picture isn’t all negative,” agreed Gray at Planet Retail. “Rarely has a new management team had such a rapid impact on UK trading, which reported its smallest like-for-like decline in some time in Q4. Range, availability, service and price perception are all understood to have improved under Dave Lewis and Alan Stewart. While concern remains over the state of the balance sheet, the more important metric of the actual health of the business, trading at the core UK unit is showing tentative signs of recovery.”

Read my related article, UK Big Box Retailers Reassess Property Requirementson Forbes.