Chief Executive's review
“I am confident that the changes we have made make the business stronger and better prepared for the challenges that lie ahead.”
My first year as Chief Executive has been a year where we have implemented important changes at Tesco, a year in which we have built strength for the future.
It has been a year of significant change and one in which we took decisive action on some very important issues for Tesco: our reset of expectations for the UK for the forthcoming year, the announcement of our intention to dispose of our business in Japan, the focus on moving Fresh & Easy closer to profitability and the renewed focus on delivering a reliable Tesco Bank. As a part of this we made several key management changes during the year which have allowed some significant new appointments as we renew and reinvigorate the Tesco team.
This has very much laid the ground for the future; a future where we will make sure that our capital and our talent are put to work where it benefits most our customers and hence our shareholders. The future Tesco will demonstrate greater innovation and creativity as we address the needs of consumers around our world – both in store and online.
We regularly deliver over 75 million shopping trips a week and as a retailer are only as good as the last trips. Ensuring that Tesco is highly valued by customers on each and every one of those shopping trips will be what makes Tesco achieve sustainable success. That is what we set out to do every day.
I believe that we have faced into challenges with real determination and taken decisions for the future. I know that it has been a tough year to be a Tesco shareholder. I know too that my whole team and I are confident that the changes we are making are the right things to do – for customers, staff, the business and its shareholders – and that the long-term opportunities for Tesco remain undiminished.
Performance in 2011/12
We delivered modest profit growth in a challenging economic environment, with a strong international performance largely offset by a reduction in UK profits. Whilst the year gave us many things to be proud of, overall it was not the most pleasing performance. My team and I are resolved to get Tesco back to winning, particularly at home.
Group sales increased by 7.4% to £72 billion, while Group trading profit was up 1.3% on last year and underlying profit before tax rose to £3.9 billion, an increase of 1.6%. Group capital expenditure in the year was £3.8 billion. Group return on capital employed ('ROCE') increased – to 13.3% (last year 12.9%).
The Board has proposed a final dividend of 10.13p per share, taking the full year dividend to 14.76p, which is an increase of 2.1% on last year.
The decisions we have taken during the year have had an impact on our financial performance. We decided to forego some short-term profit to re-invest in the long-term health of the business, with a clear focus on improving the shopping trip for customers.
The UK business clearly did not meet our own expectations in the year and, partly as a result of this, we decided to accelerate our plan to make improvements which has meant a necessary reset to expectations for our growth in 2012/13 as well. This acceleration and reset were announced with our Christmas trading update in January.
Despite this significant re-investment programme, we remain committed to driving higher returns for shareholders. Although our investment plans in the UK make achieving our ROCE target more challenging in the short term, we still expect to deliver a ROCE of 14.6% by 2014/15, with broadly based growth from around the Group.
In last year's Annual Report, I set out an evolution of our strategy into seven parts:
This strategy remains as relevant now as it did a year ago and I'm pleased to be able to update you on the progress we have made on each of these strategic objectives. I also set out immediate management priorities for the business last year – keeping the UK strong and growing; becoming outstanding internationally, not just successful; becoming a multi-channel retailer wherever we trade; delivering on the potential of retail services; applying Group skill and scale; and delivering higher returns. You will see how these priorities have shaped our actions through the year.
To build our team so that we create more value
Strengthening our management
This time last year we were in the early days of some of our new management structures. I had just introduced a matrix structure throughout Tesco with CEOs for each of our key business areas – the UK, Asia, Europe, and the US – supported by integrating functions, such as Property, Human Resources and Marketing. I am very pleased with how this structure has bedded in and expect to see even greater value creation as a result.
The introduction of a dedicated UK Operating Board has enabled greater focus at home and given the importance of the changes we are currently making for customers, I have recently decided to assume direct responsibility for the UK business during the process of its renewal.
I have continued to strengthen both the Executive Committee and our senior management teams through the last year, drawing on our deep pool of internal talent.
We have also been fortunate to welcome our new Chairman, Sir Richard Broadbent, following Sir David Reid's decision to retire. I want to thank David for his lasting contribution to Tesco over 26 years on our Board and, on a personal level, for all the help he has given me in settling into my role as CEO.
Building the Tesco team
Tesco's most important asset will always be its people, who live by our Values to do their very best for customers. Many of our plans for the coming year are built on investment in our people. We employ more than half a million people across the globe and this will continue to increase, with plans to create an additional 20,000 jobs in the UK alone in the coming two years and to continue to grow our teams around the world. It is the quality, commitment and dedication of our people that gives me so much confidence that we can and will achieve our plans for the years ahead.
We will create 20,000 more jobs in the UK over the next two years and many more around the world
Delivering higher returns
In April last year we set out a target to increase our already good level of ROCE to 14.6% by 2014/15. We improved ROCE from 12.9% to 13.3% in 2011/12. Although it is likely that we will see a small reduction in 2012/13 as a result of our UK investment plans, we continue to see a number of opportunities to drive returns and we still expect to deliver our targeted increase to 14.6% by 2014/15.
Doing the right thing
I am confident that we are ready to tackle whatever challenges lie ahead. The decisive action that we have taken in the past year and the management changes which have reinvigorated the Tesco team have laid the ground for the future; a future where we will make sure that our capital and our talent are put to work where it benefits most our customers and hence our shareholders. We have and will continue to focus on doing the right thing for customers, for communities, for staff, for the business and for our shareholders.