Tesco 'winning everywhere' in store wars

Overseas expansion and sales of non-food items keep supermarket profits rolling in

Tesco underlined its prowess as the UK's top retailer yesterday with record profits that rubbed further salt into the wounds of the former high street darlings J Sainsbury and Marks & Spencer.

The supermarket giant made a mockery of claims from Sainsbury's former chief executive, Sir Peter Davis, that the sector was battling against the toughest competition for three decades by reporting a 22 per cent rise in underlying pre-tax profits to £1.71bn. That's £55 a second, or £345 over the year for every man, woman and child in Britain.

At £1.71bn, after integration, goodwill amortisation and net property losses, analysts said its profits were within a whisker of breaking the elusive £2bn barrier. Like-for-like sales across its UK estate, which still contributes the vast chunk of its profits, soared by 6.7 per cent in the year to 28 February, with an additional 7.5 per cent rise coming from net new stores.

Speaking just one day after Tesco unleashed a £70m price-cutting campaign - its second so far this year - Sir Terry Leahy, its chief executive, dismissed suggestions that the price war would blow a hole in his bottom line. "There is no need for an atmosphere of doom and gloom," he said, adding that the sector was "as competitive as always but not more so".

Unnerved by the prospect of a resurgent third player in the supermarket sector - if, as anticipated, Wm Morrison overtakes Sainsbury's - the group declared that it thrived on competition. Indeed, its profits have shot up during the past five years, defying those gloom-mongers who predicted that Wal-Mart's arrival on these shores with its acquisition of Asda four years ago would spell doom for Tesco (see graph).

Andrew Higginson, the finance director, said: "Competition keeps you on your toes. It's very strong competition that makes you a better manager." Paranoia may not be an attribute one ascribes to the country's most successful retailer, but it is a trait Tesco is proud of, according to Mr Higginson. "We've got to be paranoid," he said when asked how the group intended to defend its seemingly unassailable 27 per cent share of the grocery market. That means round-the-clock trips to both its stores and those of its rivals, and, most importantly, a 24-hour hotline to its customers.

Just as it is hard to find anyone in the City with a good word to say about Sainsbury's, yesterday it was hard to find anyone with a bad word about Tesco. "It really is a case of, operationally it's very difficult to see how anybody can stop them. They are firing on all cylinders. Their performance looks bullet proof," one food retail analyst said.

Another said: "The only question is, how much is growth going to slow down in the UK?"

Cautious as ever, Mr Higginson said the group was budgeting for a "more normal" 12 months, after last year's exceptionally supermarket-friendly weather and sectoral disarray sent its sales soaring. For "more normal", read 3 to 4 per cent underlying growth in the UK, or 7 to 8 per cent including sales from the 23 new stores it is on track to open. Given that Sainsbury's will remain on the defensive until at least the summer, and that Tesco's sales are already running at double-digits, to hit only 8 per cent sales growth would mean it having a shocking fourth quarter, which, as one analyst said, "is not going to happen".

Although food will always be the group's bread and butter, these days it is Tesco's sales of non-food items, from flat-pack bunk beds to hi-spin washing machines, that do more to set the pulse racing. Growing at twice the rate of its grocery sales, sales of its Florence & Fred and Cherokee clothing lines, and its books, DVDs, vacuum cleaners and the like, hold the key to Sir Terry's ambition to take an even larger slice of the country's total retailing pie. Non-food sales in the UK hit £5.5bn last year - £7bn across the group - contributing 20 per cent to its top line.

And it clocked up another non-food milestone yesterday, revealing it sold more baby goods than Boots and Mothercare combined, while sales of DVDs shot up by 60 per cent. In total, it controls 12.8 per cent of the UK's total retail market, with its "step-change" in non-food taking its market share outside food to 6 per cent. That means its tills pocket one in every eight pounds spent by UK consumers. Given the increasing influence of its retailing services arm, which last year added telephony to its banking and insurance skills base, contributing £80m to Tesco's bottom line, the group's share of our pockets looks set to soar.

"They are playing everywhere and winning everywhere," one analyst said.

The group's non-food ambitions hinge on just one factor: space. Sofas and even bread-makers take up a lot more space than a tin of baked beans, lowering the group's sales densities and crowding its stores. The answer is more hypermarkets, the 100,000 square foot sites that trade under its Tesco Extra banner. It opened the first one in 1997, and today has 83 nationwide. "Given that the Government has just made it easier for retailers to get hold of out-of-town sites, property looks like becoming easier to come by, which is clearly bad news for everybody else in the retail sector," another analyst said.

And for those who don't want to trek to a retail park, the canny Sir Terry has the answer with his move into convenience stores. Buying T&S two years ago gave him the necessary footprint to stamp his Tesco Express format across the country. The "top-up" shop chain's 277 sites have struck fear into corner shop owners up and down the country, prompting an outcry from rivals and trade associations alike. Despite concerted efforts from lobby groups such as the Association of Convenience Stores to get the competition authorities to consider the convenience-store market as one and the same as the grocery market, Tesco is convinced it has right on its side.

"It's not anybody's job to protect people from competitive forces. Shouldn't consumers be allowed to choose where to shop?" Mr Higginson said.

The fourth prong of Tesco's battle to win wallets is being waged overseas, where it has some 49 per cent of its selling space. Its stores in central Europe and Asia contributed £306m in operating profit - up 44 per cent from the previous year. Although its Asian numbers were a little light, with South Korea in particular fighting a consumer credit crunch, Sir Terry declared the "risks" overseas were behind it, restating his intention to conquer ever more ground.

It aims to replicate its UK market leading position in all of its overseas markets, with success in countries such as Poland and Slovakia. Last year it added Turkey and Japan to its global empire, and Sir Terry has declared himself hungry to set up shop in China.

With comparisons being drawn yesterday between Tesco and the last UK retailer to ride so high - Marks & Spencer - analysts warned that the supermarket group would have to stay alert to the dangers of complacency. "That said, the management is absolutely brutal, so I just can't imagine the company culture becoming smug," one observer added.