The widest European reach of the country’s biggest supermarket chain is being scaled down yet again. Tesco reportedly is looking to sell off the business that it has built up in the Central European countries, and the name that has emerged at the forefront of the race to buy over is the owner of Lidl. Schwarz Group, the Czech based owner of both the discounter as well as the wider Kaufland format, is one of a number of investors interested in acquiring the business comprising hundreds of outlets in Hungary, the Czech Republic and Slovakia.
The Financial Times reported on Wednesday that Schwarz Group is set to table an offer, in particular for the Czech and Slovak units. Dutch supermarket group Ahold Delhaize and Biedronka in Poland are in the process of crunching numbers with sources saying that they are in the early planning stages, preparing for a deal. A deal is in sight for the bidding process with Tesco appointing Goldman Sachs and Citi to help advise it. The British retailer is yet to comment and the possible investors have so far declined to comment.
This Central European operation is the final part of a global strategy that once envisaged something far larger. Customer woes over the past decade meant Tesco gradually hived off, topping with the finding of an accounting scandal in 2014. The company has already exited markets in France Japan Malaysia Poland South Korea, Thailand, Turkey, and the United States. Now, what is left of the company is some 560 stores accounting for around 4.5bn annual sales, which only yielded the parent a 115m group-adjusted operating profit.
In Tesco’s case the case the logic is simple. The retailer has invested heavily in strengthening and maintaining its dominance in the UK, where it remains firmly in control. Weak consumer sentiment arising due to the ongoing Middle East conflicts have already seen to that, with sales slowing in the first quarter of the year. The Central European stores have been viewed by analysts as somewhat of a distraction from the focus on the core UK and Irish operations.
This is a commercially attractive move for Schwarz Group. Lidl is in direct competition with Tesco in many parts of Europe where its no-frills approach is effective, but Kaufland brings a sizeable hypermarket format that could take in some of Tesco’s bigger sites into its fold. Coming pre-loaded with a ready-made network of stores in neighbouring markets would enable growth to be achieved more rapidly than from a standing start. Same here for the Dutch-Jimmy-Run AA group, which already has a presence in a number of European countries under various brands including Albert and Polish discounter Biedronka.
No deal would be straightforward. Competition authorities would want to examine overlaps more closely if, for example, the Schwarz Group were to acquire Lidl and also former Tesco sites in the same cities. Local regulations, property leases and employment issues would have to be taken into account. Tesco has already announced a 75 million euro write-down on one Slovakian store, also with tough competition, so these are not always easy markets.
Still, the path is relatively clear. Under champion CE Ken Murphy, Tesco has focused on its core UK market by launching extensive campaigns on price, breadth and convenience. Selling the remaining European assets would allow resources to be channelled wholly into that battle.
