TESCO SEEKS TO INCREASE OVERSEAS PRESENCE

JAMES FALLON

CHESHUNT, England (FNS) -- Tesco plc here wants to be a major international player.

The U.K.'s largest food retailer last week outlined plans to have 45% of its selling space and $7 billion of its sales in key overseas markets by the year 2002.

"Tesco is moving from being a domestic player to being an international retailer of real scale giving us a strong position in the league of major international retailers," Terry Leahy, Tesco's chief executive, said.

Industry observers in the past have said Tesco's lack of international breadth and low share price make it a possible takeover candidate as the food retail industry increasingly consolidates on a few large global companies. Analysts also have claimed Tesco would have to make a major acquisition in continental Europe or the U.S. if it wanted to become a key international food retailer.

But David Reid, Tesco's deputy chairman, last week dismissed these suggestions, saying Tesco's growing presence in continental Europe and the Far East means it will be able to compete with the likes of Carrefour and Ahold.

"We have one of the fastest rates of growth of all the major food retailers," Reid said. "We may be able to step up going forward with more openings in more regions, but we believe it's better to focus and dominate a few regions than have a small position in lots of countries. We believe in focus."

The company revealed its international strategy in reporting a 9.9% increase in after-tax profits to $299.6 million on a 10.7% rise in sales to $14.12 billion for the 24 weeks ending Aug. 12. This compares with after-tax profits of $383.6 million on sales of $12.75 billion in the corresponding period a year earlier.

Tesco's growth was fueled by its continued strong performance in its core U.K. market as well as improved results in its overseas operations in central Europe and the Far East. In the U.K., the company reported a 9.6% rise in operating profits to $625.8 million from $571.2 million on a 7.5% increase in sales to $12.47 billion from $11.6 billion.

Tesco continues to outperform its competitors in the U.K., where the customer focus is now on better prices. Tesco's same-store sales were up 3.9% with no inflation, which is a slowdown from its past rate but still better than most of its competitors. Tesco continues to develop its own-label offering with an expanded and relaunched organics line as well as further expansion of its Finest line of prepared meals.

The company also is expanding its nonfood offering, which it expects to generate sales of $7 billion within the next two years. Tesco plans to expand the physical size of 140 of its stores to make room for more nonfood lines while also rolling out its Tesco Extra format, where 50% of the floor space is occupied by nonfood, Leahy said.

Outside the U.K., Tesco said its stores in the Republic of Ireland and in central Europe reported a 30% increase in operating profits to $18.2 million on a 27.3% rise in sales to $1.13 billion in the first half. This compares with operating profits of $14 million on sales of $886.2 million a year earlier. Tesco currently operates stores in Hungary, the Czech Republic, Slovakia and Poland and sales in these stores were up 94% year-on-year, Reid said.

The company expects by the end of the year to have 15 hypermarkets in Hungary, 10 in Poland and 11 in the Czech Republic and Slovakia. It also plans to introduce centralized distribution in Hungary in 2001, which will help speed its expansion in that market, Reid said.

In the Far East, Tesco reported operating profits of $2.8 million on an 89.7% rise in sales to $518 million for the first half. This compares with operating losses of $1.4 million on sales of $273 million a year earlier.

The company expects to have 32 hypermarkets in the Far East by the end of the year and 61 by 2002. It currently operates 24 hypermarkets in Thailand and has begun implementing a modern supply chain that includes a dry grocery depot which handles 85% of products. The company plans to build a composite depot in Thailand next year.

Tesco has three stores in South Korea with plans to open five hypermarkets over the next three months. It will add six stores next year and introduce its e-commerce operation there as well, Reid said. The company also will break into the Taiwan market in December with the opening of a 100,000 square foot store there. Tesco plans to add two more stores in Taiwan in 2001 and three in 2002.