Niche Info Online Business

Rupert Steiner, Daily Mail
2 April 2008, 9:52am

Britain's largest grocer has become an international success story but a recent spate of bad news has got investors worried the wheels may be coming off Tesco's trolley.

Critics and competitors alike will have found it hard to stifle a grin when suppliers to its Fresh & Easy start-up in America recently warned of disappointing sales.

This alone is not significant enough to wound the Hertfordshire-based grocer but what is causing nervousness is the timing of the announcements which have come thick and fast.

Investors are worried by a stream of senior managers departing to rivals, the loss of ground to rivals as its market share slips from 31.2pc to 31pc in latest TNS figures, and the withdrawal of its online clothing trial less than six months after it was launched.

The shares have dipped 477¼p since the beginning of the year to 405¼p, leading analysts to downgrade the stock. Yesterday, however, the shares rose 26p on the back of new data.

But Andrew Higginson, Tesco's finance and strategy director, says the doom and gloom is overdone.

'The share price is up on the back of our business performing well,' he said. 'The latest TNS numbers put our growth at 8.9pc over the past four weeks and a lot of retailers would kill for that.

'UK consumers have been hit hard by energy cost rises and interest rates and we have managed our costs down so we can trade hard this year.'

The future promises a hammering from the deteriorating economy and increased restrictions from regulators that are affecting the sector as a whole.

It all seems a far cry from two years ago, when basking in the afterglow of another set of record figures, Tesco executives plotted a renewed international assault.

Boss Sir Terry Leahy, the poster boy of the grocery sector, has built his reputation on fostering rapid growth and delivering unrivalled dominance at home.

It was in the 1990s he first turned his hand to developing the business abroad. It has now swollen into 12 different markets employing 450,000 with the international business generating £7.6bn in sales and £370m profit.

Much depends on Tesco's attempt to break into the US market with its Fresh & Easy concept. It will form the launchpad for a wider push against its bigger rival Wal-Mart in years to come. All eyes are on the west coast of America for news on the 50 stores it has opened in California, Nevada and Arizona.

Investors will be worried by research carried out by Mike Dennis, an analyst with Piper Jaffray, who reckons suppliers indicated the business was running 70pc below budget on American sales. He said: 'The issue is very weak footfall across all three states.'

But Higginson says these are not figures he recognises: 'I think it's a load of rubbish. You have competitors queuing up to knock it [Fresh & Easy]. The business is doing fine and the consumer reaction is terrific. To be honest it's a voyage of discovery, a bit like when the dotcom boom. If customers say they love it that's the key metric really and the rest is just logistics.'

Higginson countered accusations that the wider group was haemorrhaging staff, despite five key departures over the past 12 months.

He explained that good people come and go, and that despite Leahy's relative youth, staff do not feel there is a promotions log jam that is causing them to leave.

'Very few people leave,' he said. 'It's a very large and talented senior pool. You can have a complete career in Tesco, we are growing in double digits each year and with that comes opportunities. But not everyone is going to get Terry Leahy's job.'

While Leahy has the track record to blast his way through the combination of problems before him, few really believe the current turn of events will be his downfall.