Developing markets key as Tesco aims to deliver further growth

At an analyst visit to central and eastern Europe, which began on Wednesday, Tesco told brokers that it wants to double returns from 5% to 10%in its developing markets that comprise Poland, Czech Republic, Slovakia and Malaysia.

The central European markets account for 85% of sales from thr group of four developing markets.

Tesco will revamp its Extra hypermarkets, including improving signage and introducing more than 5,500 new product lines. The grocer said 12 Extras have been converted so far, with like-for-like growth averaging more than 20% over control stores that have not been modified.

It will also open smaller stores, some as small as 1,000 sq ft, will seek franchise opportunities, and launch an online grocery operation across the whole of central Europe and Turkey. It said the online retail market in central Europe will be worth £8bn by 2013.

Tesco updated on its own brand development. It said 45% of its central European produce is now group sourced, including 100% of its pre-packed meat.

The grocer said stockholding in backrooms has been reduced by 70%, and it has also saved £20m from distribution productivity in 2010/11, with plans to save an additional £25m in 2011/12.

Broker Shore Capital said the challenges in the market include the high cost of hypermarket sites in central Europe, competition from discounters such as Kaufland and Lidl and the Hungarian sales tax which is around £32m per year until at least 2012/13.

However, analyst Clive Black said: “We do buy into some of [the grocer’s] drives and perspectives and we feel that there are grounds to believe that additional growth can be delivered with the key parallel of rising return on capital.”