It is 17 years since the management of Tesco suffered a severe case of hubris and thought they could conquer the US. A supposedly small experiment with a format called Fresh & Easy ended in an embarrassing retreat and a near-£2bn write-off. And it is 10 years since the great accounting scandal and the bullying of suppliers, a crisis era mixed up with wacky diversions into music streaming (Blinkbox), Android tablets (Hudl) and coffee shops (Harris + Hoole).
The contrast with today could not be starker. Thursday’s strong half-year numbers were accompanied by a forecast that the full-year tally for “retail adjusted operating profit”, Tesco’s slightly odd preferred metric, will be £2.9bn, about £100m better than the last time it spoke. Given the group’s recent habit of underpromising, nobody will be surprised if the round number of £3bn is reached.
The point is that Tesco looks unbeatable when, as now, it concentrates on the day job in the UK and Ireland. The humiliation with Fresh & Easy prompted an exit from most of the other overseas adventures – Japan, China, South Korea, Malaysia, Thailand, Poland and Turkey. A small “central Europe” unit continues in Hungary, the Czech Republic and Slovakia but you have to get as far as page 7 of the half-year statement to see the misfit’s performance (briefly) described.
In the UK, the extracurricular activities mostly amount to Tesco Bank, but the bulk of that business is about to be sold to Barclays. As a group, Tesco is as concentrated on UK and Irish food retailing as it has been in years. It is the poster-child for the management school that preaches the boring virtues of “focus” and clearing out the clutter.
It is hard to see how the script will change any time soon. Grocery retailing is a volume business and Tesco’s market share in the UK (27.8% on research group Kantar’s latest monthly statistics) equals that of its next two competitors combined (Sainsbury’s at 15.3% and Asda at 12.6%). Such huge leadership bestows a permanent buying advantage. It remains a mystery why competition regulators, as late as 2018, cleared the £3.7bn purchase of the cash and carry giant Booker, a deal that extended Tesco’s influence into convenience chains, but the bottom line is that there is zero chance of the acquisition being reversed.
Meanwhile, factors that caused former managements to lose their heads – aside from pure arrogance – look less of a threat today. Aldi and Lidl were serious irritants for a long time but the headache has been eased with price-match offers and Clubcard deals. And the notional threat from Amazon hasn’t materialised; the US giant dabbles in food retailing in the UK but surely knows that there is better money to be made in hosting datacentres.
By way of bonus for Tesco, Asda and Morrisons are now owned by leveraged buyout funds and carry billions-worth of expensive junk-rated debt, which, whatever their managements say, must blunt their competitive bite. The stock market has got the message: Tesco’s shares are up 23% this year. In a distraction-free world, investors see a clear path to higher dividends a share (up 10% at the half-year) and share buy-backs.
One cannot honestly revive the old charge of “Tescopoly” because the discounters are still big enough to keep the leader honest; in any case, £3bn-ish of operating profit equals a 4.3% margin on likely revenues of £70bn this year, which is not excessive versus the high-teens returns at the likes of Unilever and Procter & Gamble.
“We are in good shape,” reflected the chief executive, Ken Murphy, who was paid £10m last year. You bet. One of these decades a successor will probably screw things up again, whether with misguided foreign expeditions or something else. But, right now, the landscape must look beautiful from Tesco Towers.