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Your Money > Investing Comment Articles > First the British...
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By Richard J Hunter, Hargreaves Lansdown
Their recent half year results - despite being against some tough comparatives from last year, when the Football World Cup was in full swing and the sun actually shone throughout the summer - did little Given that founder Jack Cohen made £1 profit from £4 of sales on the first day of trading in London's East End back in 1919, he would surely gasp at his legacy. Tesco is now the third largest retailer in the world - and, by way of comparison, the previously announced full-year figures back in April showed profits of £2.6 billion on sales of over £42 billion. Apart from its market share in food retailing which, at over 30%, is virtually double that of its nearest competitor, Tesco's inexorable growth has been helped along by a number of other factors. Its foray into online retailing has been hugely successful with Christmas sales in 2006 topping the £1 billion mark. In addition, its expansion into non-food items has put the likes of music retailers and book sellers under extreme competitive pressure, as Tesco has used its sheer size in order to provide economies of scale and wafer thin profit margins, with which these (previously) niche players can barely cope. There are of course, competitive pressures which the company itself faces. The deep pockets of US giant Wal Mart have meant that its UK subsidiary Asda can compete on similar terms. Sainsbury is still undergoing a reengineering of its business which has bolstered sales, and even Morrisons seems to be regaining some of the ground which it lost as it struggled to integrate Safeway into its stable. In addition to this, the results of a UK Competition Commission enquiry into the overall power of the supermarkets are due imminently, even though the results are not expected to be too damaging to Tesco's cause. Nonetheless, the way in which the group is positioned - and with the prospect of a cut in UK interest rates before the end of the year - ongoing prospects look robust. So where does Tesco go from here? Already the company has a presence away from the UK shores. The UK contributes around 75% of profit, with the balance coming from Europe (around 14%) and Asia (11%). This diversification has already had the desired effect. Whist the recent interim results noted a slight slowdown in UK growth, the international operations were able to step up to the plate, with a 22% increase in sales resulting in an 18% jump in trading profits. This diversification is the kind of strategy which many of its competitors envy and, for the foreseeable future, seem unable to emulate. Tesco, meanwhile, has another scalp in its sights. It will begin trading in the highly competitive US environment in November of this year. So far, it has invested £250 million in this roll out and 50 stores will be opened under the "Fresh & Easy Neighbourhood Market" brand. It has already carried out extensive market research, and has established a distribution hub at its US headquarters in California. Clearly the company means business. The US may yet prove to be Tesco's biggest challenge of recent years. British retailers who have previously attempted to transport their wares across the pond have invariably had to return home empty-handed, battered, bruised and defeated. However, it is being reported that this move is the most eagerly awaited development in the world retail calendar this year and, if Tesco can blaze their own trail, the rewards could be enormous. At that point, the general market view of Tesco - as a strong buy and as the undisputed darling of the sector - would be further vindicated. Useful links: |
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