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?

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.

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.

Recommended

Rob Arnott: Covid's hidden investment opportunities
Investment strategy

Rob Arnott: Covid's hidden investment opportunities

Merryn talks to Rob Arnott of Research Affiliates about some of the unexpected consequences of Covid and their opportunities for investors, plus the "…
24 Sep 2021
Evergrande: Chinese property giant spooks global markets
China stockmarkets

Evergrande: Chinese property giant spooks global markets

Global markets fell this week as investors worried about the fate of Evergrande, China’s most indebted property developer, which is teetering on the b…
24 Sep 2021
Investing in football clubs: how you can profit from the beautiful game
Share tips

Investing in football clubs: how you can profit from the beautiful game

Football clubs may often be money pits for oligarchs, but they are also huge global brands, says John Chambers – and investors are now starting to rec…
24 Sep 2021
The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?
US Economy

The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?

America’s central bank is talking surprisingly tough about tightening monetary policy. And it’s not the only one. John Stepek looks at what it all mea…
23 Sep 2021

Most Popular

Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021