Today I am looking at an eye-opening reason why a more intelligent approach to foreign expansion is set to drive shares in Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) higher over the long term.
Scalebacks overseas put UK back in focus
For many, the rising lights of foreign shores offer an avenue to realise spectacular and rapid earnings growth over an extended time horizon. But for Tesco, its overseas expansion strategy has failed to ignite and has instead acted as a millstone around its neck.
Earlier this month Tesco finally washed its hands of its calamitous Fresh & Easy chain in the US, having agreed to hive off its 150 stores and 4,000 staff to Yucaipa Companies, a deal estimated to cost around £150m for the British retailer. Tesco’s failed venture not only sucked up vast sums of capital, but critically diverted its gaze away from its core markets at home and allowed the competition to nip in and chip away at the supermarket’s market share.
Tesco has also built a weighty presence key emerging markets across Asia, and although these still provide potentially blockbusting earnings drivers over the long term, local problems in some of these regions in recent times have weighed on performance in recent years. Tesco has realised this and is refining its operational strategy to maximise its opportunities in these areas.
Most notably, the Cheshunt-headquartered firm started talks with China Resources Enterprise (CRE) in August over a possible merger of Tesco China’s 131 stores with CRE’s Vanguard portfolio of 2,986 shopping outlets. This will leave the British supermarket with a 20% holding in the new venture.
At face value the deal appears to be a backward step for Tesco, which is estimated to have spent around £1.5bn in nurturing its near-decade-long venture into trying to break into the Chinese market. But the new arrangement will reduce the amount of capital the firm is dedicating to its stalling operations in China, as well as allowing it to harness the local expertise of its partners and which could underpin a more ambitious push into the country at a later time.
This reduced commitment to expansion overseas is allowing the company to diligently refocus its operations at home to deliver future growth. It is planning to shift away from constructing new ‘megastores’ in the UK, instead choosing to focus on boosting the range and quality of in-store products and improving the customer experience.
In particular, plans to build on surging progress at its Convenience and Online divisions also promise to turbocharge its performance at home, and I believe that the firm’s recovery strategy is poised to deliver a stunning earnings bounceback.