At its H1 results presentation, Tesco has shared new detail about the restructure of its Polish operations, its largest business in central Europe.
Speculation on Tesco Poland sale quashed with more restructuring plans
The restructure plan builds on Matt Simister’s, (Tesco Europe CEO’s), recently completed three-year transformation programme that focused on reducing the size of its larger stores, range rationalisation, the development of its private label range and centralising distribution across the region. Contrary to press reports that it could sell the whole business, or break it up and sell to separate buyers, Tesco will instead extend the transformation programme and restore the business to profitability.
‘Releasing value from property’
Tesco closed 62 unprofitable stores in Poland in 2018/19 as part of the transformation programme. The restructure continues with this strategy by selling 17 sites that included eight of its largest hypermarkets. This disposal of property earned it £156m (€175m) and released value that will contribute to its 2019-20 full year financial performance.
‘Right-sizing the space’ in hypermarkets
With the divestment of its largest hypermarkets and the completion of its store shrinkage and space repurposing space programme, the retailer will be exiting the large hypermarket format. By focusing on compact hypermarket and supermarkets formats, Tesco Poland should become closer to the shopper and better able to compete more directly with its key competition, the discounters, by focusing on competitiveness within their catchments.
‘Right-sizing the range’
Reduced sales area space translates into fewer SKUs in-store. Hypermarkets will hold 11,000 to 13,000 SKUs - 25% reduction - and supermarkets will cut their SKU count by half. The format will be able to do so with competitive pricing on staple foods via their Starlines or Nasz Cena (Our Price) pricing structure, and better curated ranging, especially in private label.
Returning to profit-making
In the H1 2019 results Tesco announced that costs rose faster than commercial gains, 29% to 25%. But Tesco believes the restructure of the Polish business will put it on a path towards a 3% operating margin. It will do so alongside cost efficiencies already implemented, such as managing stock level and rotation and removing unprofitable categories. It is reducing the frequency of price changes to allow staff to focus on customer services and on-shelf replenishment.
Tesco Poland aims for profitability, but there are hurdles in 2019 and 2020
If the new tax structure on retailers in Poland goes ahead in 2020, it is likely to dampen Tesco’s efforts to reach a 3% margin ambition. In addition, the Sunday trading ban will act as a brake on sales growth in 2019 and 2020 as the number of lost trading days continue to increase. Unlike its leading competitors, Biedronka and Lidl, Tesco Poland does not have a clear strategy in place to offset the loss of trading days in these two years.
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