Tesco

HYPERMARKET operator Tesco Stores (M) Sdn Bhd, which posted two consecutive years of losses, expects its performance to improve this year as its three-year transformation plan kicks off and begins to bear fruit.

The impact, however, is expected to be incremental. “We will see some improvements this year and further improvements next year,” Tesco Malaysia CEO Paul Ritchie says.

He declines to say if Tesco Stores will swing back to profit, but he indicates that the business transformation is going “according to plan”, although it is just a few months into the new financial year beginning March 1, 2016 (FY2017). He adds that he is “happy” with the group’s like-for-like performance thus far.

A 70:30 joint venture between Tesco Holdings BV and Sime Darby Allied Products Bhd (a wholly-owned subsidiary of Sime Darby Bhd), Tesco opened its first store in Malaysia in 2002.

It is the third largest hypermarket operator in the country today with 56 stores, after Giant and Econsave. The retailer enjoyed seven straight years of profit from FY2007 before slipping into losses in FY2015 and FY2016, attributed to a tougher market and impairment losses.

RitchieIn FY2015, Tesco recorded a net loss of RM289.02 million on revenue of RM4.52 billion as it took a hit as a result of protests against some Western-owned businesses and a challenging economic environment. There was also a RM193.3 million impairment loss on property, plant and equipment write-off and RM118.3 million for allowance for slow-moving inventory due to changes in provisioning policy.

As at Feb 28 last year, Tesco’s total liabilities stood at RM4.28 billion, of which RM1.11 billion was under current liabilities.

Ritchie declined to divulge the losses registered in FY2016, but Sime Darby’s results in the third quarter ended March 31 showed a lower share of losses from Tesco in FY2016 compared with FY2015. Sime added that losses from Tesco had “zerorised”, which essentially means that the losses wiped out its investment in Tesco.

Ritchie was speaking to The Edge following the recent launch of if New Generation Store concept.

The hypermarket’s transformation to strengthen its business in the fast-changing retail industry encompasses all areas that will improve the customer experience, ranging from business structure and operations to people and stores.

Part of the plan includes a RM50 million investment to transform six of its existing stores into what is called the Next Generation Store concept, which focuses on rationalising the size of its stores and malls to improve the customer experience.

The floor size of Tesco Cheras, for example, has been reduced by 38%. Tesco appears to be putting into practice the saying “where the eyes go, the feet will follow”. To put it simply, if you cannot the see the product from where you stand, you may not venture down a certain aisle. At the same time, reducing Tesco’s own retail space enables it to offer more space to mall tenants for an improved mix and better shopping experience.

Apart from Tesco Cheras, the other stores that will be resized include Tesco Melaka Peringgit, Kepong, Taiping, Station 18 (Ipoh) and Kajang.The makeover will be completed by February next year. Tesco considers 6,000 sq m (64,500 sq ft) of retail space ideal for its stores.

Asked whether consumers have become more price sensitive, Ritchie says challenges remain, although things may have levelled off since the implementation of the Goods and Services Tax in April last year. “People are still buying food, (but) where the biggest challenge lies, is in general merchandise.”

Malaysian consumers, he adds, have become savvy in terms of how they spend their money rather than being more price sensitive. “They know where to go for great deals, they know what a good price is. They are more discerning.”

Competition in the hypermarket/supermarket space is tough. “We have Giant, backed by a conglomerate [Dairy Farm International]. We have AEON BiG backed by a conglomerate, and the Japanese are very good businessmen. We also have the local chains like Mydin [Wholesale Cash & Carry] who are very strong and understand Malaysian consumers. This is not an easy market ... We just have to embrace the competition and do our best.

“Then we have the strong supermarket players like Village Grocer and Jaya Grocer. These guys are growing and doing a particularly good job.”

Another of Tesco Stores’ turnaround initiatives is to improve its supply chain. “It is not about cost cutting but about getting the goods from the supplier to the shelves. We are a food retailer and we need to make sure that customers understand what Tesco offers. We have got to build [the consumer’s] trust in the Tesco brand.”

Earlier this year, the company let go of 130 employees under a voluntary separation programme. It has a workforce of about 10,000 people.

Tesco Stores table

Moving forward, Tesco plans to evaluate the retail space offering at its existing stores and is looking at making all future Tesco Stores Next Generation Stores, offering just 6,000 sq m of retail space. Tesco Plc’s annual report states that Tesco Stores’ retail space grew to 4.16 million sq ft in FY2016 from 4.03 million in FY2015, but it has projected that space will decrease to 4.06 million sq ft in FY2017.

Tesco continues to look at both owning and leasing stores. Currently, it owns 90% of the outlets it operates in. “We are constantly looking for new sites. There are still opportunities to build, but the stores might be smaller.”

This article first appeared in The Edge Malaysia on Aug 22, 2016. Subscribe here for your personal copy.

 
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