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Can Tesco PLC’s Overseas Focus Turn The Tide?

tesco2Make no mistake: retail giant Tesco’s (LSE: TSCO) woes in its home markets show no signs of abating any time soon, and latest Kantar Worldpanel data this week underlined the firm’s continued troubles at the till as its market share slipped to 28.8% in the 12 weeks to September 14 from 30.2% a year ago.

With this is mind, it is worth taking a look at the firm’s international operations for any signs of possible salvation.

Focused expansion on the agenda

Tesco has made no secret that “pursuing disciplined international growth” is one of its three strategic priorities looking ahead, a statement that seems to acknowledge the folly of its bombastic overseas invasions of bygone days.

Indeed, its poor fortunes in foreign climes were epitomised by its failed Fresh & Easy venture in the US. The unit failed to ring in a single profit since its establishment in 2007 and was the subject of a mammoth £1.2bn write-down in February 2013.

The retailing giant finally bit the bullet later that year when it dumped 150 of its stores onto the Yucaipa investment firm, and filed for Chapter 11 bankruptcy for the remaining unwanted outlets. As a final insult, Tesco was forced to swallow a £150m bill to be rid of the chain.

Having been burned by these experiences, the Cheshunt-based business has taken a more reasoned approach to generate growth in new marketplaces, and has identified Asia in particular as a future driver of profits growth.

In May, Tesco finalised a deal with China Resources Enterprise to merge its 134 stores in the country with those of domestic retail giant Vanguard, creating the largest retailer in seven of China’s eight most populous and wealthiest provinces.

This followed an accord signed with India’s Trent Hypermarket in April, which saw the British firm secure a 50% stake in the Asian firm and build on its existing wholesale, franchise and technical synergies with Trent.

Rather than go into these new regions with a bulldozer as in previous years, Tesco clearly plans to harness the local expertise of these regional players to complement its own retail knowledge and maximise returns from its financial outlay, a shrewd move given its previous high-profile failures.

… but investors should not expect a quick fix

Promisingly Tesco’s international business — which consists of stores across 12 countries from China to the Czech Republic — has shown some green shoots of rebirth in recent times. Total international sales crept 0.5% higher during March-May. And like-for-like sales in Asia improved from the previous three-month period, while in Europe underlying sales also ticked higher in the Czech Republic, Poland, Hungary and Turkey.

Still, the crippling effect of currency weakness in these key markets drove sales 8% lower during the first quarter. Meanwhile, other concerns in its growth regions include enduring political turmoil in Thailand and trading hours restrictions in Korea, all problems that could keep revenues in Asia under pressure.

In theory at least, Tesco’s rising exposure to emerging markets — and with it exploding population growth and rising consumer power — should bode well for earnings growth. But with operations in these regions only accounting for just over a quarter of group profits at present, and wider macroeconomic and industry difficulties in these places still to be hurdled, Tesco can not yet rely on these new geographies to drag itself out of the mud.

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The Motley Fool owns shares in Tesco.