Tesco launches strategic review of U.S. chain

LONDON Wed Dec 5, 2012 1:29pm IST

Shopping bags for sale are pictured inside a Fresh & Easy store in Burbank, California October 19, 2012. REUTERS/Mario Anzuoni

Shopping bags for sale are pictured inside a Fresh & Easy store in Burbank, California October 19, 2012.

Credit: Reuters/Mario Anzuoni

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LONDON (Reuters) - Britain's Tesco, the world's No. 3 retailer, has launched a strategic review of its loss-making United States chain Fresh & Easy that could lead to a sale or closure of the business.

Announcing the review alongside a third quarter trading update that showed the continued pressure on Tesco's home market, the group said it would report the findings of the review when it issues full-year results in April.

It said all options were under consideration for the business and it has appointed Greenhill to assist in the review.

Tesco said it has had a number of approaches from parties interested in acquiring either all or part of Fresh & Easy, or in partnering with the firm. It added that Tim Mason, Fresh & Easy's CEO, is leaving Tesco after 30 years with the group.

The 200-stores Fresh & Easy chain, having absorbed nearly 1 billion pounds of capital since its 2007 launch, remains stubbornly loss-making in the cut-throat U.S. grocery market and Tesco Chief Executive Phil Clarke has been under increasing pressure from investors and analysts to act.

Its third-quarter underlying sales growth eased to 1.8 percent from the second quarter's 6.9 percent.

The problems in the U.S. compounded a tough trading environment in Britain and central Europe, which was partially offset by the stronger performance in Asia.

Tesco posted a return to falling quarterly underlying sales in its home market on Wednesday, raising questions over whether its 1 billion pounds recovery plan is struggling to gain traction.

The firm, which takes about one in every 10 pounds spent in British shops, said sales at UK stores open over a year, excluding fuel and VAT sales tax, were down 0.6 percent in the 13 weeks to November 24, its fiscal third quarter.

That compares with analysts' forecasts in a range of down 0.9 percent to up 0.2 percent and an increase of 0.1 percent in the second quarter, which had been Tesco's first rise after 18 months of decline.

Tesco said the UK slowdown particularly reflected weak general merchandise.

BATTLING FOR MOMENTUM

Tesco, which trails France's Carrefour and U.S. leader Wal-Mart by annual sales, makes around two thirds of its sales and three quarters of its profit in Britain. It stunned investors in January with its first profit warning in more than 20 years.

The group is battling to regain momentum against a weak economic backdrop, with consumers fretting over job security and a squeeze on disposable incomes.

Tesco has also suffered in the economic downturn more than its main British supermarket rivals, in part because it sells more discretionary non-food goods where shoppers have been cutting back most.

In April Clarke launched a new strategy to revive the company's fortunes in its key domestic market, investing in more staff, revamped food ranges, smartened stores that allocate more space to food and refined marketing and advertising.

Rivals Asda and J Sainsbury Plc have both recently reported sales increases and the only major domestic rival to have reported a decline was No. 4 player Wm Morrison (MRW.L), albeit for different trading periods.

Tesco's problems are not confined to the UK and the U.S..

In South Korea, Tesco's biggest overseas market, underlying sales fell 5.1 percent as legislation allowing local governments to impose shorter trading hours continued to hurt trading, while in eastern Europe underlying sales were down 3.6 percent, reflecting fallout from continued euro zone instability.

Tesco's woes are reflected in its shares, which have fallen 20 percent over the last year, closing at 322 pence on Tuesday.

For the group total third quarter sales increased 2.4 percent.

(Reporting by James Davey; editing by Kate Holton)

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