1planetretail.net

Strategic Preview: Q2May 2013 – August 2013

30 September 2013 DAVID GRAYRetail Analyst

1. Expectations for the Quarter

2. UK: Q2 Strategic Changes

3. Global: Q2 Strategic Changes

4. Outlook

5. What’s new at Planet Retail

Strategic Preview: Tesco Q2

3

UK like-for-like sales (inc. VAT) will remain broadly flat in Q2, with the possibility of a slight decline.

1. Expectations for the Quarter1. Expectations for the Quarter

Q1 2009

Q2 2009

Q3 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%Tesco UK: Like-for-Like Sales by Quarter, 2009-2013 (%)

Com

para

ble

Stor

e Sa

les

(%)

Note: Includes VAT, excludes fuel; Due to changes to VAT rates some figures are VAT-adjusted; Excludes Q4 2009 as only inc. petrol figure was released by Tesco. Source: Planet Retail

Actual Like-for-Like SalesProjected Like-for-Like Sales

4

Tesco is testing sub-letting space to third parties in some of its largest stores.

2. UK: Q2 Strategic Changes2. UK: Q2 Strategic Changes

TESCO is in talks with sporting goods retailer Sports Direct and gym operator Xercise4Less on space sharing. Sports Direct could take over mezzanines at three of Tesco’s stores. Xercise4Less will take space at Tesco’s Stockton-on-Tees outlet. Downsizing or sub-letting space to other retailers is one of a number of

measures being considered by Tesco to utilise excess out-of-town space. Tesco has already implemented a space sharing scheme in the Czech Republic in partnership with Sports Direct.

We see the out-of-town space issue as having been exaggerated in the UK, with Tesco facing far lesser problems compared to European rivals such as Carrefour, where hypermarkets can be over 10,000 square metres. However, letting space will generate rental income for Tesco. It will also increase destination appeal and floor space productivity. That said, Tesco will need to choose the parties to which its rents space with care.

Tesco opens tyre-fitting service in partnership with Black Circles at a store in Bletchley, near Milton Keynes. We are encouraged by Tesco’s willingness to trial the provision of new

services at large stores. The introduction of a tyre-fitting service in partnership with Black Circles – a well-established online tyre specialist – also has potential to drive additional footfall to the store. If successful, it could be rolled out to other outlets.

© th

esun

dayti

mes

.co.

uk©

Ret

ail W

eek

5

Global Update

3. Global: Q2 Strategic Changes3. Global: Q2 Strategic Changes

US: Tesco announced the sale of its Fresh & Easy arm to investment firm Yucaipa, which will acquire 150 stores along with the Riverside distribution centre. The remaining 50 outlets will close. We take a positive view on the sale of Fresh & Easy. It will remove an

unwelcome distraction for Tesco both in terms of funds and man hours. This is a good outcome as it will offload the majority of stores (circa 150) to one buyer, leaving only 50 where Tesco will have to manage the closure. A far better outcome than selling piecemeal to a variety of buyers – which we must remember had been more widely anticipated.

The cost of approximately GBP150 million (USD232 million), which includes a GBP80 million loan against the Riverside DC alongside costs associated with the closure of the 50 stores, is also lower than some investors had feared.

Now comes the question what will Yucaipa, the investment fund set up by Ron Burkle, former owner of the Wild Oats brand, do with the stores? It has been speculated the outlets may re-open under a new identity similar to Wild Oats – a chain of organic food stores which were sold to Whole Foods Market in 2007.

Even so, the sale of Fresh & Easy in itself will do little to change the issues facing the chain, particularly poor site selections and product offerings that were not geared to the interests of shoppers in the specific location. While the new owner will be able to adjust their strategy to rectify the latter, the former (site selection) will be difficult, if not impossible, to fix.

© S

tore

bran

dsde

cisi

ons.

com