Tesco Struggles As Profits In Europe Tank 67 Percent

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The British supermarket chain and world’s third largest retailer Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY)’s £1 billion ($1.62 billion) turnaround plan failed to boost sales. Tesco reported disappointing half-year results on Wednesday. For the half-year ending August 24, the company reported a profit of £820 million ($1.33 billion). Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) had earned £1.24 billion in the same period last year. While profits from its Asian operations plunged 7.4 percent to £314 million, earnings in Europe sank 67 percent to £55 million.

Tesco Struggles As Profits In Europe Tank 67 Percent

Tesco forms joint-venture in China

Revenues for the six months ending August 24 rose slightly from £31.31 billion to £31.91 billion. Soon after Warren Buffett boosted his stake in the company last year, Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) announced a £1 billion restructuring plan to upgrade its shops, product ranges and online offering.

Over the past two years, Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) has exited operations in three of the world’s largest economies. Last month, it sold its U.S. unit Fresh & Easy. The company has already sold its Japanese operations. And today, the company announced it will combine its Chinese operations with those of China Resource Enterprises (CRE). Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) has 134 stores in China, while CRE operates 2,986 stores through its Vanguard business. Under the terms of the deal, Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) will pay $554 million to the Chinese firm to get a 20 percent stake in the joint-venture. Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) expects to close the deal in the first half of 2014.

The company retreated from key international markets to focus on its UK business, which accounts for about 67 percent of its total sales. Same store sales in the UK declined by 0.5 percent in the first half. Sales shrank 1 percent in the first quarter, but were flat during Q2. Despite weak performance of the company’s European operations, Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) CEO Philip Clarke said the company is committed to its European business.

The problem with Tesco

Kathy Gordon of The Wall Street Journal says that the biggest problem with Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) is its big box model. The company has big stores stuffed with a wide range of products. But consumers now prefer small convenient stores and online marketplaces. Budget conscious shoppers make frequent visits to convenient stores to get less pricey items near their home. Or, they order the products online. Though the company is focusing on its online business and convenience store model, it is still stuck with the big stores.

American shares of Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY) went down 1.14 percent to $17.41 at 11:02 AM EDT.

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