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Tesco - unsuccessful

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08 September 2015 -

The divestment is expected to bring in £3.35bn in cash for the troubled supermarket, but will this latest move be enough to turn around the struggling UK business?

Jermaine Haughton

The UK's largest supermarket has sacrificed its successful South Korean venture Homeplus retail stores, as chief executive Dave Lewis continues his attempts to address the company's crumbling balance sheet.

Marking Tesco's entry into the profitable South Korean consumer market in 1999, the Homeplus stores were a clever joint venture with electronics giant Samsung, utilising the tech brand's popularity and experience in the Far East nation.

Unlike other foreign speculators, France's Carrefour and US giant Walmart, Homeplus's 1,075 stores and 139 shopping malls managed to gain some traction with local buyers, aided by features such as a cultural centre providing cooking and English lessons. Over 16 years, the Tesco venture also built 140 hypermarkets across South Korea, only comparable to domestic stalwarts E-Mart (155) and Lotte (114).

Judged by sales, Homeplus is the second-biggest firm in the industry.

However the last 24 chaotic months for Tesco, including a record pre-tax loss of £6.4bn for the year to February, has forced the retailer's hand in selling its South Korean asset for £4.2bn to private equity firm MBK. The sale is expected to be worth £3.35bn in cash for Tesco, once taxes and other costs are deducted, and is expected to help reduce the group's net debt of £9.3bn according to Standard and Poor's.

Tesco boss Dave Lewis, nicknamed "Drastic Dave" due to his reputation as a ruthless decision-maker, said: "This sale realises material value for shareholders and allows us to make significant progress on our strategic priority of protecting and strengthening our balance sheet."

Troubled times

Replacing Philip Clarke as the retailer's CEO last October, Lewis has had to steer the company through a number of crises, starting with the news that Tesco misstated profits by £263m last year.

In an increasingly saturated industry, Tesco has also suffered a loss of market share in the UK due to a fierce food price war with discount supermarkets Aldi and Lidl.

In the 12 weeks leading to March 2015, Aldi reported a 0.7 percentage point rise in its grocery market share to 5% compared to same period in 2014, according to research firm Kantar Worldpanel. By contrast, Tesco's market share fell by 0.1 percentage points to 28.7% over the same period.

Changes to consumer behaviour, preferring shopping frequently throughout the week rather than a single weekly visit, and the revival of upmarket chain Waitrose has left Tesco "stuck in the middle", according to industry commentators, leaving the retailer's previous strategy outdated.

The supermarket has also suffered from a £1.3bn increase in its pension deficit to £3.9bn, and further increases to other debts it has accrued through its ill-judged expansions, both nationally and overseas, since 2000.

Since the turn of the century, sales more than tripled from £20bn to almost £70bn for Tesco. But within the same period net debt levels - total debts less cash on the balance sheet - jumped from £2.1bn to £9bn. The chain also has liabilities under operating lease commitments, stemming from when Tesco sold its property assets and rented them back on long-term contracts to accelerate growth and maintain dividend payments.

Amongst this intense pressure to satisfy customers, investors, employees and regulators, Lewis has made regaining formerly loyal Tesco shoppers a major goal. He aims to achieve this by promising to lower grocery prices, but with significant debts still hanging over the business these cuts cannot be too large.

Improved credit rating?

As the first major sale by Tesco since Lewis' arrival, the divestment of Homeplus could be very important in improving the supermarket's credit rating. At present, two of the most important credit rating agencies, Standard and Poor's and Moody's, have Tesco at the lowest rating - junk.

By paying off its debts, Tesco will eventually find it easier to borrow money at a cheaper rate and pay less to insure itself against the possibility of default. Lewis said the money from the sale of Homeplus would be used primarily to redeem bonds and other commercial debt over the next 18 months, but might also be used to purchase the leases on some UK stores.

Sven Reinke, senior credit officer at Moody's, said: "Our rating already anticipated that Tesco could enter into a transaction of this size. This announcement eases the negative pressure on the current rating. However, for positive pressure, Tesco's underlying UK business needs to recover and I don't think we are at that stage yet. We see signs of stabilisation but not of a sustainable recovery."

Theoretically, greater borrowing capabilities can allow the leading UK supermarket chain to fund investment in its domestic operations, as it streamlines its services and builds a new and brighter future.

But while the sale of Homeplus will provide some welcome funds, there is still a long way to go before the company's restructure is complete. Market research unit Dunnhumby, the company behind the Tesco Clubcard, and Tesco Broadband are among other assets up for sale, while further divestment is planned for ventures in Turkey and China.

Only time will tell if this is enough to return Tesco to a profitable future.

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Tesco pulls out of South Korea to dent UK debt pile

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08 September 2015 - The divestment is expected to bring in £3.35bn in cash for the troubled supermarket, but will this latest move be enough to turn around the struggling UK business? Jermaine Haughton The UK's largest supermarket has sacrificed its successful South Korean venture Homeplus retail stores, as chief executive Dave Lewis continues his attempts to address the company's crumbling balance sheet.

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Successful

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Is a company worth the expected growth premium wired into its stock price? Beyond the Core, a new book by , who leads the global strategy practice at Bain & Co. , tells investors how to choose stocks with the right growth strategies.

In his search for factors that underlie successful growth strategies, Zook compared 12 pairs of companies. Each pair consisted of two companies in the same industry which started off the decade (1990 to 2001) with similar revenue and earnings, but ended up with very different financial trajectories due to their contrasting growth strategies.

One set of companies saw their stock prices increase almost tenfold, while another one by only threefold. What were the main differences in the new business initiatives between the slow and fast value creators?

One key factor, according to Zook: When a company moves into a new line of business, it should closely relate to the firm's core operations.

In seven out of the 12 pairs of companies Zook studied, the companies that lagged in creating value for shareholders did so because they moved too far away from their area of expertise. Consider the example of two British grocers: Tesco and Sainsbury .

The two grocery chains followed divergent growth strategies: Sainsbury's foray into new lines of business included acquisitions of retail chains in Egypt and Texas. Tesco, on the other hand, decided not to stray far away from its core business; instead, it added new products and services-such as eyeglasses and coffee shops-in its existing stores.

"We knew we were a supermarket and only invested in things that we could prove our customers really wanted," said Lord Ian McLaurin, who is now chairman of Tesco.

Over the last decade, Tesco's stock price grew 291%, while Sainsbury's stock only grew by 38%.

Zook writes that another factor to consider in analyzing growth initiatives is whether new lines of business are concentrated in profit pools-areas in the industry that generate the highest profits. Sometimes new profit pools can be created by going up-market, as when Starbucks introduced premium-priced coffees. Most of the time, however, profit pools are created by sharply lowering costs.

Five out of 12 company pairs analyzed by Zook were influenced by the correlation of their new business lines to profit pools. This was apparent in Zook's study of two drug different drug wholesalers: Cardinal Health and McKesson .

Cardinal grew by buying businesses that were in services which helped Cardinal's clients or vendors manage pharmacies or help package drugs. In this way, Cardinal created profit pools for itself, by helping its suppliers cut costs. Its main rival, McKesson, acquired a health care software business, HBO & Co. , which was disastrous.

Cardinal's stock price grew at an annual rate of 30% over the decade ending in 2001, and McKesson by only 7%.

Zook also claims that in order to be a winner, a company must be willing and able to match the investments made by the leaders in its industries. This, writes Zook, is why Walgreen and Eckerd Drugs had very different outcomes at the end of a decade.

Eckerd grew faster than Walgreen but spread itself too thin nationally and lost it leadership position in regional markets. Walgreen grew more organically and achieved high market shares regionally. Walgreen's high local-market shares resulted in higher returns on investment than its competitors. Eckerd was purchased by J.C. Penney in 1997; Walgreen continues to be a strong performer.

The table below lists five of the 12 pairs of companies analyzed by Zook, in which he feels that the fast value creator (first set of companies) is still on the correct growth track for investors.

Different Growth Strategies Can Drastically Affect Stock Performance Prices as of Feb. 3. NA: Not available. -/+: Company went from losses to profits during time period. *Annualized; projected over the next three to five years. **Compounded and annualized from 1990 to 2001. ***Annualized from 1990 to 2001. ****Eckerd was acquired by J.C. Penney in 1997. Changes in stock price from 1993 IPO to 1997 acquisition. Sources: FT Interactive Data, Reuters Fundamental and Thomson First Call via FactSet Research Systems

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Companies With Successful Growth Strategies

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Is a company worth the expected growth premium wired into its stock price? Beyond the Core, a new book by , who leads the global strategy practice at Bain & Co. , tells investors how to choose stocks with the right growth strategies.

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Nestle - Successful

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Apple - Successful

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Woolworth's unsuccessful finance

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Coca Cola - unsuccessful

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The problem with New Coke was that it broke tradition. By 1980, Coke was an identifiable icon, and changing the taste was almost like changing people's lives. The taste of New Coke probably didn't offend them the most; it was the idea of New Coke that hurt fans of Coca-Cola.