Tesco's Global Ambitions Fizzle: A Return to UK Dominance

A couple of decades ago, Tesco was going to bestride the globe. Little ol’ UK, plus Ireland, didn’t offer enough room for the country’s biggest supermarket chain to expand, ran a theory that was encouraged from outside by complaints about a “Tescopoly”.

“We are on the threshold of becoming one of the few successful international retailers,” declared Sir Terry Leahy, then the chief executive, in 2007, confidently predicting that half the group’s revenues would come from overseas within a decade.

A US business had just been launched, adding to an international portfolio that included operations in Japan, China, Thailand, South Korea, Malaysia, Czechia, Poland, Slovakia, Hungary and Turkey.

And now? The non-UK and Ireland parts of the empire have shrunk to what Tesco calls its “central Europe” division: 560 stores in Czechia, Slovakia and Hungary.

Even that unit could now be on the way out. The Financial Times reported this week that Tesco is exploring its options with bankers, which usually means it is a seller at the right price.

What happened? Several things. First, Leahy’s pet US project, Fresh & Easy, turned into a stale and difficult flop. It was pitched as a low-risk experiment on the west coast but ended in a write-off of £1bn-plus, an expensive lesson in the perils of chasing your losses.

Second, there was the enormous accounting scandal of 2014, a confidence-draining event that forced management to look inwards. The South Korean Homeplus business was sold for £4.2bn the following year. The big one, the Thai and Malaysian operation, went for £8bn in 2020.

Third, Tesco discovered that the German discounters had not been completely vanquished in the UK. Aldi and Lidi, were mere irritants in the early 2000s, kept chipping away.

Meanwhile, the idea that Amazon of the US might one day decide to take a bigger punt on food retailing in the UK served to concentrate minds further on domestic threats.

Should anybody mourn the disappearance of that 2007 vision of a UK company becoming shopkeeper to the world? Well, Tesco shareholders won’t. The reality is that success in overseas food retailing is trickier than picking a long-term growth market and riding a wave of greater consumer prosperity.

As Tesco discovered in China, local retailers tend to have a keener understanding of local tastes. You can waste a lot of time and money trying to prove otherwise. Even in the discount-heavy market of central Europe, the job involves more than replicating a UK format. Tesco’s business there has been going roughly sideways.

The great retreat has been excellent for the share price, which has doubled in the past five years. Freed of distractions on the other side of the world, Tesco’s competitive position in the UK looks as strong as it has ever been. Its market share of 28.2%, according to Worldpanel’s numbers, beats the next two (Sainsbury’s at 15.2% and Asda at 11.5%) combined.

The process has been enormously assisted by the baffling generosity of the competition regulators, who in 2018 allowed Tesco to buy the Booker cash and carry giant for £3.7bn.

There’s no danger of the deal being unwound, despite the re-emerging debate about the return of Tescopoly. Likely growth in online, convenience and wholesale make the reported internal target of getting to 30% market share credible.

As an investment proposition, it is very simple: keep beating up the over-leveraged, private equity-owned duo of Asda and Morrisons, null the discounter threat with “Aldi price match” offers and direct excess cash at share buy-backs. The shareholders are happy and the chief executive can collect £10m in annual pay.

Nobody will complain if the decluttering exercise, which included the sale of the bulk of Tesco Bank to Barclays, now extends to central Europe. The empire-building dreams died a long time ago.

Overseas retailing, especially in food, is hard, as even the US group Walmart, the closest counter-example, demonstrated with its two decades of uninspired ownership of Asda. In terms of pure returns on invested capital, domestic dominance is just easier.