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UK: Tesco Links Up With C&W For Major Telecoms Push

Tesco set its sights on capturing a bigger slice of the broadband and home phones market yesterday as part of its strategy to increase revenues from more profitable non-grocery markets. The supermarket group, which is holding two days of seminars on its ambitions to grow in markets like telecoms and banking, said it had agreed a five-year deal with Cable & Wireless for the telecoms company to supply it wholesale broadband services. This will allow it to offer a more comprehensive range of products, including a combined broadband and home phone service for the first time which will step up its challenge to the likes of BT, TalkTalk and Virgin Media.

The deal is part of drive by Tesco to tap new sources of often higher margin growth, whether abroad, online or in services like banking and telecoms. In July 2008, when it bought Royal Bank of Scotland out of a financial services joint venture, Tesco set a target to double annual profits from retail services to £1bn over an undisclosed period.

Andrew Higginson, Chief Executive of Tesco Retailing Services division, said yesterday this meant investing more - for example setting up in-store phone shops and bank branches - but that this was paying dividends. "Returns in retailing services are still higher than the group as a whole even with this significant recent investment -- and going forward the profit growth enabled by this investment will drive ROCE (return on capital employed) even higher," he said in slides posted of Tesco’s website (download slides).

Tesco did not say how much it was investing, but said retail services operating margins and ROCE were 13% and 19% respectively in 2008-9 compared with group averages of 6% and 15%. The group said its large store base and Clubcard customer loyalty scheme would allow it to expand quickly, and at less cost than many competitors. It also expects to benefit from cross-selling products, noting that customers using two of its retail services spend on average four times as much in store as those who don't use any.

Tesco Telecoms Chief Executive Lance Batchelor said customer turnover in Britain's fixed telephone and broadband markets, together worth around £8.8bn a year, was running at around 20%, creating a big opportunity for the group to grow. It will double its number of in-store Phone Shops to 200 by the end of 2010, and with an eventual target of 500 it sees the potential to create a telecoms business making about £2bn a year in revenues and £200m in profit.

Batchelor said that at the heart of the expansion would be plans to sell, for the first time, a combined broadband and home phone service. That would pitch Tesco Telecoms into direct competition with companies such as BT, TalkTalk and Virgin Media, through which Tesco sells a standalone broadband product. Batchelor said, “Tesco Mobile has shown that we can be successful in telecoms if we have the right partners and the right offer. The new agreement with Cable & Wireless enables us to offer very competitive pricing”. He said that the partnership with Cable & Wireless would minimise Tesco’s capital expenditure and avoid the risk of investing in technology that could be obsolete in a few years. Other elements of the strategy outlined by Batchelor included plans to expand Tesco’s range of mobile phone services. The retailer mainly sells pay-as-you-go services, but is planning a big push into the more lucrative contract field.

Also speaking yesterday, Laura Wade-Gery, head of the Tesco.com online business, saw similarly strong potential for her business, noting that while Internet sales are growing rapidly across Britain they still account for just 7% of total retail sales. She said Tesco, which uses existing stores to serve online customers, was reaching capacity in some areas, and so was opening new stores dedicated to only serving Internet customers. With two currently in operation, it plans to open a third next year and about one a year for the next few years.