Tesco plans $1.6 billion U.K. outlay

LONDON — The British supermarket chain Tesco announced Wednesday a $1.6 billion investment program that it hoped would revive earnings in its home market by expanding its online business while adding fewer large stores.

Tesco, the world’s thirdlargest supermarket chain after Bentonville- based Wal-mart Stores Inc. and the French company Carrefour, is trying to reverse a decline in profit in Great Britain, where it had been growing for 20 years. In Britain, Tesco competes with Wal- Mart’s Asda brand.

Tesco’s spending program comes after criticism from investors that Tesco neglected its base as it focused on expansion abroad, including in the United

States, where it started the Fresh & Easy chain of grocery stores.

Over the past two decades, Tesco grew into a retail behemoth and a darling of investors, with earnings increasing by at least 5 percent almost every year since 1994. But a recession in Britain, a costly expansion in the United States and China, and ventures into banking and selling used cars turned Tesco into the worst-performing stock on the London Stock Exchange FTSE 100 index this year. A shift in consumer behavior toward online shopping further hurt Tesco, which must maintain a network of large and costly stores.

Traditional retailers are increasingly under pressure as online purchases erode their sales. Some, like Wal-mart, have started buying small startup companies or competing online retailers to better cope with the migration of customers to the Internet.

Philip Clarke, Tesco’s chief executive, said last week that he planned to invest $321 million to add more products to the company’s online stores while reducing the pace of expansion for its brick-andmortar stores. Tesco would add about 38 percent less retail space in Britain in the 2012-13 fiscal year than in 2011-12, he said. The company will also slow its expansion in the United States, Europe and Asia, where it has already decided to leave the Japanese market.

“As customers go more to convenience and online, we reduce our store expansion,” Clarke said.

“The plan makes sense,” said Freddie George, an analyst at Seymour Pierce in London. “Over the last couple of years they’ve taken their eyes off the ball in the U.K.”

The retail environment in Europe remains difficult because in continuing economic crisis households are reluctant to spend, said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers.

Following in Amazon’s footsteps, Tesco has started to allow other retailers to sell their products through Tesco’s website. Tesco has started out by allowing two retailers — Crocus, which sells plants and gardening supplies and equipment, and Maplin, which sells batteries, electronics and electrical goods — to sell through Tesco.com. The strategy is intended to drive more customer traffic to the site, and Tesco receives a percentage from every sale. Tesco said it plans to add more retailers.

The company said it plans to expand the products it sells online to 200,000 by the end of the year, from 80,000 now. It also plans to increase the number of “click and collect points” — places where customers can collect purchases they have ordered online, rather than waiting for delivery — to 1,600 by the end of this year from 770 now.

Although Tesco plans to slow its overseas expansion, Clarke said, the company was not giving up on its Fresh & Easy stores in the United States.

Tesco now expects the business to break even about a year later than initially expected, but the company projects that Fresh & Easy will have some profitable months in 2013.

“The U.S. is moving in the right direction, but I’d like it to move faster,” Clarke said. “I need to demonstrate to shareholders, who have been very patient with us, that we can do it.”

When Tesco started its Fresh & Easy brand, it saw a chance to fill what it saw as a need for convenient grocery stores in certain areas of the western United States. But about five years later, only 30 of the 186 stores are making a profit.

Clarke said losses at Fresh & Easy narrowed for the first time in fiscal 2012 but that Tesco would slow down the opening of new stores in the chain and be more cautious about how to expand the business. Instead, Tesco is remodeling the stores it has and will try to attract more customers with fresh flowers, wooden floors, refrigerator cases and in-store bakeries.

“There’s undoubtedly frustration about what is happening in the U.S.,” said Clive Black, an analyst at Shore Capital. “Not pressing on as aggressively with store openings is positive, but patience is being tested.”

Tesco also plans to slow the pace of its expansion in China, where it said it is not immune to the impact of rising wages. It is also halting the expansion of Tesco Bank, which offers financial products like credit cards and insurance. The company has already announced it will close Tesco Cars, which sells second-hand automobiles and began just a year ago.