Tesco’s lesson for Woolworths

Tesco's lesson for Woolworths

Aussie retailer rumoured to be a bidder for Hong Kong supermarket grocery chain

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 12, 2013 2:27 pm AEST

With news that Woolworths (ASX:WOW) could be on the brink of expanding internationally, the supermarket retailing giant would be wise to learn from UK retailer Tesco's US experience.

Woolworths is believed to be one of a number of bidders for Li Ka-Shing's ParknShop, the second-largest grocery chain in Hong Kong, with around $3 billion in sales from its 345 stores. Woolworths has been keeping an eye out for international opportunities for several years, in an effort to raise profit growth.

But Woolworths would do well to learn the lessons from Tesco's expansion into the US. The UK retailer entered the US in 2007 (probably not the greatest timing either!), opening smaller format stores and differentiating itself from larger operators like Wal-Mart and Safeway by focusing on selling fresh food and ready-to-eat meals. Yesterday Tesco signalled an end to that episode, selling 150 Fresh & Easy stores.

Tesco was also forced to writeoff is $2 billion investment in April this year, resulting in the first annual fall in profits in two decades. And the costs haven't stopped there, with still more to come from closing its remain US stores, estimated at around £150 million.

Having gone close to reaching saturation levels in Australia and New Zealand, Australia's two largest supermarket retailers, Woolworths and Coles – owned by Wesfarmers (ASX:WES) – are looking for new avenues to drive growth. Coles is diversifying into financial products, with news that Wesfarmers is seeking a banking licence, so Coles can offer deposit accounts to its customers. Both companies have also entered into the hardware, liquor and hotels sectors. IGA supermarket supplier Metcash (ASX:MTS) is heading off in a different direction, investing in auto accessories retailing.

The biggest fear for Woolies shareholders is that the company pays too much to acquire ParknShop, and in the process takes on too much debt, or is forced to raise equity to fund the deal.

Foolish takeaway

The recent experience of Australian companies expanding offshore is not a pleasant one. Insurance Australia Group (ASX:IAG) had a disastrous foray into the UK, while National Australia Bank (ASX:NAB) still has its two UK banks that it has been unable to offload. Woolworths shareholders (including myself), will be hoping Woolworths doesn't follow suit.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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