Forbes has produced an interesting profile of the successful UK retailer Tesco and its well-planned foray into the US. Tesco, the largest UK-based retailer (and the fourth largest in the world behind Wal-Mart, Carrefour and Home Depot) has a strong history of overseas expansion combined with steady domestic growth, such that it currently derives 23% of revenue from outside the UK.

Claire Cain Miller’s piece in Forbes points out Tesco’s international successes has a lot to do with the extraordinary research it undertakes before venturing overseas, noting that:

[Tesco] want to get under the skin of their customers … Before opening stores in the tricky Japanese market, for example, Tesco spent three years studying, during which time its staff lived with Japanese families as fly-on-the-wall observers. They learned that a weekly haul from the supermarket won’t fit in typically cramped homes.

Result: a think-small model, in packaging and stores. The strategy has paid off. Carrefour pulled out of Japan two years after Tesco’s entry, Wal-Mart is struggling with a grocery acquisition there, and both Wal-Mart and Carrefour left South Korea in Tesco’s wake.

Tesco’s local and global performance has reaped benefits for shareholders. Last year, Tesco grew underlying earnings by more than 13%, while EPS rose by 18.5%. Even more impressive has been Tesco’s overseas growth, with non-UK sales growing by 25% on an annual compounding basis since 2002. (That said, Tesco scrip dropped 4.84% last night on the back of slowing domestic growth last quarter, however, international sales still rose by a healthy 24.6%).

The Tesco story is in stark contrast to the recent follies of the Coles Group. It’s not without irony that Coles, which last month announced that comparative same-store sales had actually fallen by 0.3% (on the year-to-date basis) is trading on a forward price-earnings multiple of 26, compared to Tesco’s forward PE multiple of only 18.

While Coles’ is “in-play”, and a significant takeover premium is built into the share price, one wonders why anyone would be willing to pay 44% premium for an Australian retail company which is losing ground, compared to a British retail company which has maintained double-digit earnings growth over the past five years.

At a price of $16.47 per share (or around $19.5 billion), Wesfarmers must have a pretty low opinion of John Fletcher and the current Coles management team.

Peter Fray

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