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Every little helps Tesco to £1.09 billion profit

03/10/2006

Supermarket giant Tesco has unveiled mammoth half-year profits of £1.09 billion on the back of strong UK and international sales.

In the 26 weeks to August 26th, the retailer's sales were up 12.7 per cent to £22.7 billion, while its profits themselves rose 10.3 per cent compared to 2005.

Since the mid-1990s Tesco has operated in 13 overseas markets, including Turkey, China and Japan, with international sales soaring by more than a fifth during the last six months.

The company says it has opened more than three million square feet of retail chains outside of the UK in the half-year, and believes it will have created about 20,000 jobs across the world by the end of 2006.

Gaining a foothold in the potentially-lucrative US market is now one of the group's priorities.

"Our international businesses delivered another good performance, despite challenging economic and competitive conditions in some markets. Sales growth has been strong, profits have advanced well and margins continue to improve," a statement read.

Not to be outdone, however, core UK sales also rose apace by 10.2 per cent.

Traditionally a food supermarket, the firm has increasingly diversified into other areas, with non-food sales increasing 12.6 per cent during the half-year.

Meanwhile, Tesco says sales through its website have gone up by about a third, with online profits rising 43.1 per cent.

Sir Terry Leahy, Tesco chief executive, today said: "Tesco is continuing to deliver strong progress across the group, with all four parts of our strategy contributing, as more customers vote with their feet and shop with us."

He explained that the company's enduring strategy was to promote its core UK businesses, to become an international retailer, to be as strong in non-food as food divisions and to develop its high street retailing services.

But Tesco's growth has come at too high a cost to other businesses, a thinktank has claimed.

Speaking to BBC Radio 4's Farming Today, Ruth Potts, press and public affairs officer at the new economics foundation (nef), said that "there is clear evidence that Tesco has been allowed to get too big".

"They have been allowed to grow to a level where they have been allowed to dominate the UK grocery sector. The power that they have been allowed to gain means that they can exert an enormous influence all the way along the supply chain," she explained.

But Sir Terry defended his firm's apparent dominance of Britain's supermarket industry, insisting that such concerns "do not worry" him.

"It's understandable that as businesses get larger, people and society ask questions around that success to make sure that it doesn't come at a price for somebody else; I think that goes with the territory," he told the Today programme.

Sir Terry added: "I think it's understandable that rivals would be a little bit upset; Tesco has had a good run and it has taken market share and customers away from those companies, but that's what fair competition is all about."

Meanwhile, another analyst has suggested that the financial picture might not be so rosy for Tesco after all, predicting that its margins may fall due to higher costs incurred through overseas expansion.

Jeremy Batstone of stockbrokers Charles Stanley told BBC Radio Five Live: "In terms of profits the company has said that they're going to make £5 billion worth of property disposals over the next few years, and so it comes down to the definition of what profit includes, because Tesco would like us to include the profit on profit sales as part of the figure.

"It may very well be that one of the hidden figures within this set of superlatives will be the trend in margins, which could conceivably be down," he explained.

"Sales are clearly going to be very strong because of the World Cup and the warm summer, however costs are likely to have gone up a little bit so margin trend may be the slight factor that prevents much share price out-performance today," the expert concluded.

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