Tesco stores rethink as profits hit

Retail giant Tesco has marked the end of the supermarket "space race" as it scrapped more than 100 major store developments and admitted future growth would be focused more online.

The UK's biggest supermarket said the days of snapping up land and building major stores that led to its success in the 1990s were now behind it as customers increasingly shop over the internet.%VIRTUAL-SkimlinksPromo%
It announced the move as it reported its first annual profits fall in nearly 20 years, down 51.5% to £1.96 billion, hit by slowing sales growth and a raft of hefty writedowns, including £804 million from the decision to pull its major UK store pipeline.

Tesco also revealed a £1.2 billion hit from its failed foray in America, confirming plans to offload its Fresh & Easy business in the US were "well advanced" with interest from buyers for all or parts of the business. The US exit has left it nursing a £1.2 billion impact to its bottom line, with post-tax profits plummeting by 95.7% to £120 million. On an underlying basis, pre-tax profits fell 14.5% to £3.5 billion.

Tesco's plans will largely see big Tesco Extra developments pulled, although the group did not reveal which sites would be affected. Philip Clarke, chief executive at Tesco, said: "The large stores we have are great and we are doing a lot of work to make them more vibrant and relevant for today's customers, but we won't need many more of them because growth in future will be multichannel - a combination of big stores, local convenience stores and online."

He said the financial impact of the group's decision was as a result of land being bought at the height of the property boom more than five or 10 years ago. "That is before the 2008 financial crisis, before the iPhone, social media, tablet computers, before we knew how profoundly technology would change both how we and our customers live and shop," he added.

Tesco said online sales reached the £3 billion milestone after rising 13% in the year to February 23. In an effort to keep customers coming to its stores, Mr Clarke is taking steps to improve the shopping trip through brand relaunches, store makeovers and hiring more staff.

Mr Clarke insisted his UK turnaround plans were on track as Tesco saw its best like-for-like sales growth for three years in its final quarter, although the 0.5% rise marked a slowdown on the 1.8% surge seen during Christmas trading.

He admitted sales over the past few months had been impacted by the horse meat scandal as customers steered clear of frozen meat products. Tesco had to withdraw four products from sale amid the crisis, but said the effect on overall sales was minimal and stressed that trading was now "back to normal".

Its shares fell 3% and Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said investors were "not entirely convinced" by the group's turnaround plans. He added that it will be a "slow process before the company can hope to recapture its former glories".

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