Tesco ‘must invest up to €1.2bn’ to turn around British business

Tesco needs to invest up to £1bn (€1.2bn) to turn around its flagging British business, a process that may take up to three years, according to its fourth-largest shareholder.

In addition to the “significant” sum required, the supermarket chain needs to provide clarity on where the money is being spent, the returns expected and how the grocer measures its effectiveness, said Richard Black, a fund manager at Legal & General in London. The investor owns 3.99% of Tesco’s shares.

“The critical thing for Tesco is to get themselves back on the front foot and I think that could be quite a material investment,” Mr Black said. The retailer should also consider reining in spending on ventures which do not align with its core grocery business, he said.

Tesco announced last week that it was closing Tesco Cars, its used car unit, after a year because it could not offer “a satisfactory range of vehicles”.

Britain’s largest retailer has promised a year of investment to lower prices, add staff and improve stores, products and fresh food as it seeks to revive sales growth. Tesco shares have fallen 20% this year as investors balked at Christmas sales that missed estimates and it forecast “minimal” profit growth in 2013.

Restoring British profit margins to last year’s 6.14% will be a “multi-year process” after the domestic division was “neglected” for several years, according to Mr Black.

Tesco spokesman Tom Hoskin said the company stays close to investors and knows what they expect of the grocer. The chain will set out its plans in more detail later this month.

“The investment required is materially ahead of a couple of hundred million and if it is a small amount we will be very sceptical if it can get any traction at all because it appears to us the issues are long running.”

Warren Buffett’s Berkshire Hathaway is Tesco’s biggest shareholder with 5.08%.

Tesco is due to report full-year earnings on Apr 18. Revenue at the company rose 2.7% in the 12 weeks ended Mar 18, trailing an industrywide increase of 4%, according to Kantar Worldpanel data.

“I don’t think there are any surprises so far in what’s being done,” Jon Copestake, retail analyst at the Economist Intelligence Unit, said of the changes, citing a focus on fresh food at smaller competitor Morrisons and updates to own-brand ranges at Asda.

— Bloomberg