Tesco chief executive Philip Clarke

Tesco chief executive Philip Clarke

The new head of Tesco has told just-style that the retailer increased prices to cope with rising raw material costs last year, but admits that slumping demand for clothing is now presenting a problem of its own. Joe Ayling reports from the company's full-year results briefing.

Supermarket giant Tesco is vowing to boost its clothing business after the country's largest retailer posted flat full-year general merchandise sales in its domestic market.

Speaking at a media briefing in London, Tesco CEO Philip Clarke confirmed to just-style that clothing prices have been upped to offset the impact of higher costs, such as cotton.

"Rising raw material costs are affecting the price of the garments on sale for sure," he says. "You'll be as aware as I am about the pressures that we've seen in cotton prices and the selling prices have gone up a peg, but the market price has gone up as well."

Tesco is not alone in rising prices for garments, with UK price-tags also impacted by an increase in VAT at the beginning of this year. But buoyant European and Asian clothing sales have also helped to protect margins.

"Our profit contribution remains high in Asia, Europe and the UK," Clarke adds.

What the analysts say
Tesco's slower domestic apparel sales disappointed analysts who say the retailer needs to keep a close watch on price architecture, quality and design.

“While the clothing market has been challenging for many retailers, particularly so over the last six months, Tesco’s clothing and footwear sales are disappointing, particularly as this has been a big focus for them over the last year," Sarah Peters, senior retail analyst at Datamonitor's retail arm, Verdict, tells just-style. 

“While growing the international business is important to Tesco, Philip Clarke made clear in his presentation that the UK is still very much a focus for the business and will therefore be very keen to get clothing sales back on track.  
 
“The difficulty for Tesco is that it has such a broad customer base, making it difficult to target everyone in clothing.

"It must ensure it uses its sub-brands effectively to target different customer groups and offer a clear, good, better, best price architecture to allow customers to trade up and down, particularly as there are signs consumers are looking for value – not just in terms of price, but in terms of quality and design too.”

Non-food difficulties
Clarke, who only took the reins at Tesco from veteran CEO Sir Terry Leahy last month, says that sales of non-food and discretionary items started to soften around November last year.

"As it softened we had our own local difficulties," he says. "Our clothing assortment wasn't quite right, so that didn't sell as well as we had hoped."

He says the November dip primarily affected the company's 200-store Tesco Extra hypermarket chain in the UK, which sells a large assortment of general merchandise items, including clothing. Clarke said that rising fuel prices were also deterring people from travelling to these stores.

"The clothing season comes and goes quickly though, and if you look at our clothing and apparel ranges in store now they are a bit more on-trend," he added.

Another way Tesco wants to improve non-food sales is through e-commerce investments. Although Clarke says Tesco "doesn't need to be the next Amazon", a new non-food e-commerce site in South Korea is "a sign of things to come", he believes.

Flat domestic sales
Tesco's UK general merchandise sales grew just 0.4% to GBP5.3bn for the 52 weeks ended 26 February. Despite the domestic blip, the company reported 9% clothing sales growth in Europe and "strong growth" in Asia.

This meant that the retailer's overall general merchandise, clothing and electricals sales rose 8.8% in the year to reach GBP10.3bn. However, like-for-like sales across the category fell 3.3% during the second half, faster than the 0.3% decline seen in the first half.

It follows news last year that Tesco had reached annual clothing sales of GBP1bn (US$1.54bn) for the first time, but this figure was not provided today. Nevertheless, boosting general merchandise sales is undoubtedly a priority for Tesco.

"Improving the performance of these categories in the UK is a priority," the retailer said in a statement, adding: "We have strengthened the teams and they are working on improvements to ranging, merchandising, pricing and promotions."

Tesco's overall trading profit increased 7.8% to GBP3.7bn (US$6.01bn) for the year, as sales of products ranging from groceries to properties increased 8.1% to reach GBP67.6bn.

So it seems that with stronger momentum in European and Asian markets, together with revenue streams from other business operations, the retailer is weathering the storm of relatively low non-food sales growth and rising raw material prices.