Tesco should keep its Asian assets

The £7bn that Tesco could get for its Tesco Lotus business in Asia looks enticing. But holding on to it would be smarter, says Matthew Lynn.

Tesco CEO Dave Lewis
CEO Dave Lewis: will he sell the sizzle?

Andrew Parsons / i-Images

The £7bn the store could get for its Tesco Lotus business looks enticing. Holding on would be smarter

It has been a tough few years for Tesco. The UK's largest grocery chain crashed in 2014 amid an accounting scandal and it has been struggling to revive its fortunes ever since. It sold off its South Korean and Turkish chains for more than $6bn, pulled out of the US and sold off British assets such as the Giraffe restaurant chain and its mortgage business. Dave Lewis, its chief executive until he leaves next summer, understandably wanted to concentrate on turning around its core British supermarkets. In the chain's glory years, it felt it could export a winning formula and conquer the world. When it was in trouble, all those overseas units were just a distraction from the problems at home.

Flogging the crown jewels

The mooted sale of its Asian unit, if it happens, will be the biggest divestment yet. Tesco Lotus operates 2,000 stores in Thailand and Malaysia. If it is sold it could fetch £7bn and perhaps more. The whole business is worth only slightly over £20bn. Tesco Lotus is one of the major grocery chains in two fast-growing emerging markets. It is a valuable asset. If it is sold, aside from a central European unit Tesco will be an exclusively British business. The British business faces many challenges the rise of the discount chains, Brexit, competition from online retailers so management needs to keep its eye on the ball. But selling the Asian unit will make the business a lot duller.

Advertisement - Article continues below
Advertisement - Article continues below

The British grocery market is saturated. There is very little prospect of any meaningful growth. There is hardly a town left that doesn't already have a supermarket. Indeed, lots probably have too many. If immigration falls, as it probably will, the population will be static, so there is little prospect of demand expanding. Fewer and fewer people are going to the shops any more as retailers close on the high street and shopping centres become less attractive places to visit. We all need to eat, so we will still be buying groceries, but succeeding in the industry is going to be a dull, hard grind that will take hard work just to stand still.

By contrast, Asia offers growth. Malaysia and Thailand are still developing countries, with growth rates this year of 4.6% and 3.8% respectively. Vietnam, Indonesia and China all offer possibilities for expansion. Tesco had made a great start and started building a brand and expertise in one of the most dynamic regions of the world. If the UK business was stable, Asia could have provided the sizzle along with the steak.

Better to think of the long term

When a company gets into trouble, it is easy to think of selling off units. Some cash will be raised, shareholders will get a special dividend and the company will look in better shape for a few years. But it will sacrifice the potential for long-term growth. Associated British Foods could easily have sold off its Primark fashion chain years ago, for example. In some ways it would have made a lot of sense. But Primark now contributes much of its profits and growth. Whitbread was an old and slightly dull brewer, but its Premier Inn and Costa Coffee chains have both turned into the real drivers of its growth. Costa has now been sold to Coca-Cola, but the budget hotel chain is still thriving. Next was originally launched as a unit of the now largely forgotten Hepworth's chain and could have been sold off in its first decade, but went on to become one of the UK's most successful retailers.

The City is quick to demand that units be divested, that companies be sold off and that businesses that drift apart be demerged. It likes the deal-making and shareholders get an instant fix of cash. Yet the price in the medium-term can be a high one. A company needs to have the potential for expansion. It needs some excitement and zip. And it often needs to hang onto an asset for a very long time to realise its full potential. Tesco stripped of its Asian unit will be a simpler business. But it will also be a boring one. In truth, shareholders should worry a lot less about an instant cash injection and a lot more about long-term growth because that is what is going to deliver over the decades.




The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Tesco cashes out of the mortgage business

Tesco Bank has left the mortgage market by selling its £3.7bn loan book. Its 23,000 customers will be moved to the Halifax, a subsidiary of Lloyds.
5 Sep 2019

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular


House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020