Last Updated Apr 21, 2009 11:12 AM EDT
In a statement, the company summed up its U.S. woes:
Sales overall were lower than anticipated at the time of last year's preliminary results, as a consequence of our previously announced decision to maintain, rather than accelerate our rate of new store expansion during the second half given the severity of the economic downturn in some geographic markets in the Western U.S.Discounting also hurt profitability. Fresh & Easy stores had to introduced 98 Cent Value Packs in their produce departments some months ago to entice consumers then expanded the program when it proved popular. Just last week, Fresh & Easy launched an initiative that provides discounts for multi-pack purchases, so that 20-count Fresh & Easy tea bags are now available at a bargain price when consumers purchase two at a time.
U.S. trading losses reflect the fact that the U.S. business â€" which has now been trading for 16 months â€" has been built with the necessary infrastructure in place from the beginning to support hundreds of stores. At this stage, it is therefore operating with high overhead and other costs in relation to the scale of the business, whilst also trading from immature stores.
Simultaneously, competition is heating up. Trader Joe's has been focusing new store growth in California while Wal-Mart and Safeway launched small store formats in Arizona and California respectively to challenge Fresh & Easy for the convenience grocery niche it covets.
Tesco's total U.S. sales were 208 million pounds, about $304 million, last year and same store sales enjoyed a strong advance at 30 percent, which reflect a growing familiarity with Fresh & Easy stores among consumers. Yet, despite that positive sign, the U.S. operation is dragging down Tesco's international business, which contributed 51 percent of the growth in company sales and 45 percent of the growth in profit, if you exclude U.S. results.
Investors may insist that Tesco, which spent about 300 million pounds, about $438 million, on capital expenditures in the U.S. last year as it was suffering 148 million pounds in real losses, apply its resources where it can expect better returns.