While the supermarket giant’s blip is a surprise, Costa Coffee continues its prosperous expansion
AFTER EIGHT years and an investment of £260 million (€296 million), Tesco has abandoned its ambitions to build a business in Japan in a rare setback for the world’s third-largest retailer.
Tesco chief executive Phil Clarke promised when he took over from Sir Terry Leahy in March that there would be “no sacred cows” and he’s proved true to his word with the decision last week to sell the 129-store Tokyo-based business.
When the British retailer moved into the vast, but notoriously difficult Japanese market in 2003, it was completely unknown there. Eight years later, little has changed – the group failed from the start to win over local shoppers, who are served by a huge network of 24-hour convenience stores. Tesco’s share of the highly fragmented Tokyo grocery market, where even home-grown retailers struggle to make decent returns, never made it through the 1 per cent mark. The British retailer’s losses in the market last year are estimated at between £20 million and £30 million.
For a company of Tesco’s size – sales of £68 billion and profits of £3.8 billion – those are little more than a rounding exercise. Elsewhere in Asia, which is Tesco’s fastest-growing territory, the retailer is faring far better, particularly in countries such as South Korea, where it has built a sizeable and profitable operation.
While immaterial financially, the move is strategically significant, as it demonstrates the new chief executive’s reluctance to tolerate underperformance in any corner of Tesco’s empire. That message will not have been lost on Tim Mason, deputy chief executive and the man who heads up the group’s struggling Fresh Easy chain in the US.
Fresh & Easy racked up losses of £186 million last year, a figure that can hardly be dismissed as a rounding exercise. And by the end of Tesco’s current financial year, accumulated losses in the four years since Fresh Easy was set up l are expected to top a hefty £700 million.
That can be tolerated by a company of Tesco’s size and profitability, but not indefinitely. The US business needs to come right soon and Mason, who was once regarded as the natural successor to Leahy, will be keenly aware of that. Clarke last week insisted that the US was a very different case from Japan and he’s sticking with his forecast that Fresh Easy will reach breakeven by 2013.
If that target is not met, it seems safe to say that Clarke will have little hesitation in pulling the plug. Many other foreign retailers have tried and failed across the Atlantic but, while the Tesco boss was praised for acting decisively on Japan, a U-turn on the US would deal a much greater blow to Tesco’s reputation – and to Clarke’s.
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While gloom surrounds much of the High Street, one retailer is managing to buck the trend with impressive sales rises and an ambitious expansion plan.
Costa Coffee, owned by Whitbread, has reported a 25 per cent leap in total sales over the half year to August 18th, reflecting its hectic store opening programme, aimed at doubling its 1,295-strong chain in the UK. Worldwide, it has almost 2,000 outlets. Even stripping out new shops, underlying sales were still ahead by 6.6 per cent.
For the group as a whole, taking in the Premier Inn budget hotels chain and the Beefeater Grill and Brewers Fayre restaurants, total sales were ahead by 6.6 per cent – making it one of the fastest-growing consumer-facing companies in the FTSE 100, according to chief executive Andy Harrison.
The average purchase at a Costa outlet is £3.50, which makes a trip to the coffee shop “an affordable treat,” Harrison said. Costa was the best-performing parts of Whitbread although Premier Inn, which offers rooms for as little as £29 a night, did well too.
On the restaurants side, sales came under pressure and the group was forced to cut its prices to persuade consumers to part with their cash.
Costa is a prime example of the so-called “lipstick indicator” – the phenomenon whereby shoppers resist larger purchases in tough times and treat themselves to smaller luxuries instead, such as a lipstick, or a coffee.
Whitbread has done well to persuade customers to carry on spending as their disposable incomes continue to shrink. But there must surely come a point when either those little treats are no longer affordable or there are simply too many fancy coffee shops to sustain such gravity-defying sales growth.
Fiona Walsh writes for the Guardiannewspaper in London