Tesco set to slam brakes on UK expansion after profit warning

London: Tesco is poised to slow its store expansion in the UK as part of the strategic blueprint to be outlined this week by new chief executive Philip Clarke.

Clarke is under pressure to attract more customers to UK stores and to appease uneasy investors, after Tesco's first profit warning in 20 years.

The company is expected to scale back openings of big stores and store extensions, focusing instead on smaller stores, according to four people familiar with the situation. The move is expected to prompt other supermarkets to follow suit, ending the so-called "race for space" among UK grocers.

Analysts at Nomura, joint broker to Tesco, said: "We expect Tesco to signal a phased reduction in its rate of UK space growth, with a shift in emphasis away from large hypers towards smaller formats."

Nick Coulter, analyst at Nomura, said: "Changes to the store pipeline will take time to work through but by removing the largest extensions and new builds we think the amount of space laid in the UK every year will fall in the order of 15 per cent.

"Moreover, given Tesco's share of the industry pipeline in recent years it could feasibly fall by up to 25 per cent, without impacting its ability to hold market share."

Coulter estimates that opening fewer of the biggest hypermarkets and cutting back on store extensions could cut Tesco's UK capital expenditure by £200 million (Dh1.2 billion) to £1.3 billion this year. Other analysts suggested the company could be more aggressive, cutting spending on land and building new UK stores by £300 million to £400 million a year.

Tesco, however, is expected to spend hundreds of millions of pounds revamping stores, enhancing its fresh food offering and making its stores feel less utilitarian. It will also continue to open convenience stores.

JP Morgan Cazenove, joint broker, has estimated that Tesco could spend just under £800 million on the refurbishment programme over the next two years, redirecting some of the money it would have spent on new stores into the overhaul.

Three-year moratorium

One big shareholder said Tesco had spent too much opening UK stores, and wanted to see this curtailed, with the cash used elsewhere.

Clive Black, analyst at Shore Capital, has called for a three-year moratorium on new UK store openings, aside from sites already in progress, convenience stores and Dobbies garden centres, saving £500 million to £750 million a year.

Tesco is also expected to announce a big push in its online business, particularly in non-food areas. Coulter said he expected Tesco to extend its "click and collect" service to its entire 2,300 Tesco-branded store estate, including its 1,400 convenience stores.

Tesco refused to comment on any aspect of the new strategy.

— Financial Times