Tesco performing well despite recession

SUPERMARKET chain Tesco is performing reasonably well in Ireland, despite having to deal in a recessionary market and having to implement restructuring activity costing £15m (€16.2m) in the first half of 2009.

While global group profits are up 11% in the group interim results released yesterday, Tesco Ireland has had to carry this exceptional one-off restructuring cost this year.

Faced with the challenges of a severe recession and cross-border trading, the store decided to reduce retail costs in line with the Irish consumer’s reduced spending power.

Tesco integrated its international brand buying with its UK business, leading to the prices of 12,500 products being reduced by an average of 22%. The cost of this exceptional restructuring activity was £15m in the first half of this year.

In a nationwide roll-out over the last few months, Tesco closed and then re-opened every Irish store with the revised offer on display. This initiative has led to a significant uplift in sales volumes, offsetting much of the impact of lower prices.

These changes, combined with a substantial cost reduction programme, have enabled Tesco Ireland to deliver what it calls “a steady financial performance despite the economic headwinds and significant self-imposed price deflation”.

Meanwhile, yesterday’s interim report also highlights the positive impact of growth in sales of ready meals, organics and non-food products on the group’s global performance. Group operating profit rose by 11% to £1,602m (€1,703m), despite the negative impact of significant petrol deflation during the first half of this year.

Of more general interest, some analysts accept Tesco chief executive Terry Leahy’s reading of these results as a sign of growing consumer confidence. Notably, many shoppers are bypassing the bargain bins and opting instead for organic foods and premium brands.

“We’re seeing signs of a gradual improvement in the world economy,” said Mr Leahy. “Shoppers are starting to treat themselves again, and the sales of organic foods, ready meals and premium ‘finest’ products are rising.”

Mr Leahy also said the company had performed well in international markets, despite taking a few short-term hits. In the UK, business growth was boosted by the opening of several new outlets.

Tesco’s acquisitions of Homever in Korea and Tesco Bank have also made good contributions to sales and profits. Tesco Bank is the new brand name for Tesco Personal Finance.

With its share price standing at 387.7 pence yesterday evening, Tesco has fallen 4% in the past year, compared with Sainsbury’s 3.6% gain and William Morrison Supermarkets plc’s 8.2% climb.