Tesco Asia sales slump, profit soars
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Tesco Asia sales plummeted in the last half year – but profit soared by nearly a quarter.
The UK headquartered supermarket operator, which operates Tesco Lotus in Thailand and Tesco in Malaysia – said in its trading statement that Asian operating profit before exceptional items was £141 million, up 24.8 per cent at constant exchange rates and 39.6 per cent at actual rates.
“This improvement has been driven by refocusing on our core retail offer and significantly
reducing the level of short-term promotional coupon activity. Furthermore, we have continued to focus on reducing our cost base as part of the group’s overall cost savings program and to help offset inflationary cost increases in the region.”
Overall Tesco Asia sales fell by 6 per cent at constant exchange rates, with like-for-like sales falling 8.3 per cent.
“The sales performance in Asia reflects our decision to withdraw from bulk selling activities in Thailand at the start of the financial year. Before this impact, underlying like-for-like sales in the region were down circa 2 per cent, largely as the result of a reduction in the level of short-term promotional couponing activity and the deflationary impact of lowering our food prices for customers. New store openings contributed 2.3 per cent to sales growth in Asia,” the company said.
“Strong progress”
Tesco CEO Dave Lewis hailed “strong progress” for the group as it reported an eightfold rise in overall first-half profits to £562 million and resumed dividend payments after a three-year hiatus.
“New store openings contributed 2.3 per cent to sales growth in Asia,” the company said.”
“Our offer is more competitive and more customers are shopping at Tesco. Today’s announcement that we are resuming our dividend reflects our confidence that we can build on our strong performance to date,” he said.
“Market conditions have been challenging with inflationary pressure being felt throughout the half, but we have worked hard with our supplier partners to minimise price increases for customers.
“Our overall sales inflation in the half was around 1 per cent less than the rest of the market, helping us become even more competitive.”
However some analysts were a little more cautious in their assessments, suggesting the retail will soon have to raise its prices in the UK.
Molly Johnson-Jones, senior retail analyst with GlobalData, said Tesco UK could not afford to maintain the 1 per cent inflation gap with its rivals and simultaneously reach its ambitious 3.5 – 4 per cent margin target and £1.5 billion cost savings goal by the 2020 year.
“Tesco’s ability to maintain its price competitiveness will be challenged by cost inflation, which will continue through to 2019, and shelf-edge inflation, which will reach a peak of 2.9 per cent in the first half of 2019. Using our price tracker, we have seen that Tesco raised its prices circa 2 per cent during the first half, and we estimate that they are, therefore, absorbing about 1 per cent of cost inflation. At the moment, this ability to absorb cost inflation comes from the volume benefits that it has gained from suppliers.
“We predict that Tesco’s prices will begin to increase towards 2019 as volume benefits from its supplier negotiations start to dissipate.”
Questions & Answers
Q.Why did Tesco's sales in Asia decline while profit soared?
Why did Tesco's sales in Asia decline while profit soared?
The decline in sales was due to withdrawing from bulk selling in Thailand and reducing promotional coupon activity. Profit increased because of refocusing on core retail, reducing couponing, and lowering the cost base to offset inflation.
Q.What specifically caused the drop in like-for-like sales in Asia?
What specifically caused the drop in like-for-like sales in Asia?
The decline in like-for-like sales was primarily due to the reduction in short-term promotional couponing and the deflationary impact of lowering food prices for customers. The withdrawal from bulk selling in Thailand also had a significant effect.
Q.Why are some analysts cautious about Tesco's future price competitiveness in the UK?
Why are some analysts cautious about Tesco's future price competitiveness in the UK?
Analysts are concerned that Tesco UK cannot maintain its 1 per cent inflation gap with rivals while simultaneously achieving its margin and cost savings targets. They predict cost inflation will challenge price competitiveness through 2019.
Q.How has Tesco managed to absorb cost inflation in the UK until now?
How has Tesco managed to absorb cost inflation in the UK until now?
Tesco has absorbed cost inflation by using volume benefits gained from suppliers. However, analysts predict this ability will diminish, leading to price increases as these volume benefits start to dissipate.
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