LONDON -- Tesco PLC is expected to launch a review of its loss-making Fresh & Easy Neighborhood Markets Inc. U.S. venture as its CEO attempts to convince investors that he has a credible strategy to boost the British retailer's fortunes, reported Sky News. Philip Clarke will announce Wednesday that Tesco is to undertake a strategic review that could lead to the sale or closure of some or all of its U.S. stores.
Investment bankers have been appointed to assist with the review, which is expected to take several months, according to the report.
Earlier this year, Tesco pulled the plug on its Japanses venture, prompting speculation about Fresh & Easy.
The announcement will signal an "ignominious end" to Tesco's U.S. ambitions, five years after it opened its first shop there under the Fresh & Easy brand name, the report said.
El Segundo, Calif.-based Fresh & Easy Neighborhood Markets operates approximately 200 Fresh & Easy stores in California, Arizona and Nevada and employs about 5,000 people. Since the business was launched, it has accumulated losses running into several hundred million pounds, Sky News said.
Tesco declined to comment to the news outlet on Tuesday evening on its plans for Fresh & Easy.
The news is likely to please Tesco "the City" (U.K.'s Wall Street); observers have been anticipating the development since Clarke said in October that he needed to be persuaded that the U.S. arm had a future in the group.
It is unclear whether there will be a serious appetite from third parties to buy the Fresh & Easy chain, which leaves open the prospect that Tesco may have to make significant layoffs as part of its plans to exit the U.S. market, the report said.
Theoretically, its strategic review could involve Clarke determining that Tesco should continue with its efforts in the United States, but analysts said that was highly unlikely.
Mike Tattersall, analyst at UBS, told The Telegraph in a separate report that Tesco has a "mountain to climb" to convince investors about the "long-term viability" of Fresh & Easy.
"From a trading perspective, after many quarters of strong like-for-like growth, the business slowed markedly in the first half and, given how far adrift the operation is from breaking even--let alone generating an adequate return on the $1 billion pound-plus capital invested to date--we believe a dramatic reacceleration will be required to provide any hope that this is not a doomed project," he said.
Clarke said in October that he still agreed with his previously stated view that the business needs 300 shops to sustainably break even, said the report, despite announcing the week before that there would now be 200 Fresh & Easy stores by the end of this year instead of 230 initially planned in an attempt to stem shareholder losses.
Clarke said the cut in store openings and capital going into the business was because Tesco has "decided to prove to ourselves and shareholders" that Fresh & Easy stores can deliver share-holder returns "before the next phase of expansion. ... We can't be certain that opening another 100 stores will get us to breakeven. ... If it doesn't [break-even] then we will have to do something else. Who knows what that will be."
In April, Clarke said he did not expect Fresh & Easy to break even until its 2013/14 financial year, against a previous target of 2012/13, said a Reuters report.
As well as cutting spending, Clarke has cut costs at Fresh & Easy's head office by five million pounds and brought in a new chief operating officer to revitalize the stores.
Dave McCarthy, analyst at Investec, told the Telegraph, "Although management seemed loath to admit it, it seems it is preparing to exit the U.S., and this would be good news for shareholders. Tesco is cutting capex and is trying different things, again, but we believe that an exit is the best option. As it looks very unlikely Fresh & Easy will ever become a meaningful part of the business, it is time to stop wasting resources, losing money and damaging reputations."
Click here for previous CSP Daily News coverage of Tesco's Fresh & Easy.
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