Ever since Dave Lewis was appointed chief executive of Tesco last year, he has made strengthening the balance sheet a priority for the troubled retailer.
Although Homeplus in South Korea was a profitable business, the focus has been on protecting Tesco’s UK market share in light of increasing competition from lower priced discounters, such as Aldi and Lidl.
"Drastic Dave" has been keen to sell off any operations that aren’t pivotal to its core business, with Tesco having already closed all of its Homeplus stores in the UK. The retailer has recognised that whilst the business remains so diverse, it will struggle to become profitable in the near future. Tesco’s strategy has been to consolidate its international business (such as in Turkey and China) rather than to expand, which will ensure the company’s reliance on the UK market is set to continue.
UK price wars
Tesco’s over-expansion and the intensifying food price wars in the UK has meant they have become "stuck in the middle" as they have taken a hit not only from discounters like Aldi and Lidl but also upmarket rivals Waitrose, which has had a detrimental impact on Tesco's profits.
The supermarket price wars in the UK show no sign of slowing as coinciding with the discounting trend, UK consumers have also switched to a series of top-up shops throughout the week benefiting not only discounters but also value variety stores such as Poundland.
Tesco’s decision to sell off its South Korean operations is just one aspect of a huge restructuring underway with the retailer opting to sell off much of its portfolio including Blinkbox and Tesco Broadband as well as the forthcoming sale of market research unit Dunnhumby.
Speculation is continuing to mount that Amazon Fresh’s launch in the UK market is imminent, representing another challenge for Tesco with its online business having been one of its few success stories and despite having been the first grocery retailer to introduce a £4 charge for ‘click and collect’ orders under £40.
Dave Lewis has acknowledged that reducing Tesco’s huge debt is the immediate priority which is why scaling down its international store network is no surprise. However, this does not mean that Tesco will put a stop to its international expansion as F&F (Tesco’s standalone clothing brand) is becoming an aspirational fast fashion brand with plans to launch in the US and perhaps a stepping stone to reach an even larger global audience.
Home is where the heart is
Tesco needs to refocus on its core retail activities in the UK before it can look to expand internationally once more. The company should maintain the shift towards being a multichannel retailer by continuing to develop its online business in-line with the growth of its convenience business and progressively replace non-performing out-of-town stores. The sale of its South Korean Homeplus operations is a sensible one and another sign that "Drastic Dave" is delivering on his promise to revive the fortunes of the UK’s biggest retailer.