About time too. Tesco’s decision to get out of the US (or, in corporate-speak, launch a “strategic review” of the business) is long overdue. For a business that accounted for just 1 per cent of Tesco’s sales in the first half of the year it attracted a disproportionate amount of attention. Tesco has little to show for the £1bn it has spent in the US, other than £800m of accumulated losses and a 200-store estate that struggled to attract shoppers.
Decision time was rapidly approaching. Much of the investment to date has gone on overheads – supply chains, manufacturing bases, the lot. And that infrastructure could cope with far more than 200 stores, so to keep the chain at the current size made little sense. Credit Suisse had forecast that its Fresh & Easy US business would break even in 2014-15. But even assuming 5 per cent revenue growth per year after that, and a 5.5 per cent operating margin, Fresh & Easy would not have reached the group’s 14.6 per cent return on capital target until 2034. Getting there faster would have required more investment in stores.
And Tesco is no longer in the mood to be a big spender. With the core UK business struggling (like-for-like sales in the UK fell 1.2 per cent in the third quarter), the company is becoming increasingly frugal and picking its targets far more carefully. A sub-scale operation in a mature market no longer fits the bill. As it is, Deutsche Bank says that an exit from the US will improve the group’s return on capital by 120 basis points.
The US distraction is not entirely out of the way – Tesco still has to find an exit route and deal with a possible write-off – but the decision to leave is a good start. The challenge now is for the company to find other homes for its capital that are not just more attractive than the US in their own right, but will also keep the company growing despite its domestic troubles.
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