Do you know Tesco?
Though not a household name in the United States, Tesco PLC (LON:TSCO) is the largest retailer in the United Kingdom. It is a behemoth of a company — many times the size of Whole Foods Market, Inc. (NASDAQ:WFM) and Safeway, or any other U.S. grocer, with the exception of Wal-Mart Stores, Inc. (NYSE:WMT). It may be in part that Tesco resembles a smaller, younger version of the latter that Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) owns more than 5% of the outstanding shares. Buffett often talks about his biggest mistake in investing — not buying Wal-Mart Stores, Inc. (NYSE:WMT) in the ’80s because it was a few cents more than he wanted to pay. The cost to shareholders over time, he says, is in the billions. So perhaps this is an effort to right one of his few mistakes in the past.
For others, though, Tesco PLC (LON:TSCO) has been a troubling company in recent years. This past year showed a continued struggle, and members of management has gone as far as to cut their own bonuses for the period as an apology for performance.
Profits are down for the first time in years, and the company’s U.S. experiment has, for now, failed. But what lies ahead for Buffett’s grocery store?
Correction
Management has reversed course on a multiyear expansion plan. The race for space has stopped as the company realized that smaller-format stores and online sales will probably drive growth going forward. As reported by Bloomberg, the company’s expansion plans for the past few years were largely based on the economic and technological environment several years ago — before much of the innovation and change in trends that have recently taken hold.
This means a few important things for the company and its shareholders. Tesco PLC (LON:TSCO) is scrapping 100 major store projects in favor of expanding its Express format — adding a total of 1.26 million square feet this year, as opposed to 1.3 million last year. The company is also going to focus on refining its online sales platform — spending $750 million in global development.
Bottom line
The worst may be behind Tesco PLC (LON:TSCO). Fresh & Easy stores will be sold off or shut down (the company is writing down $1.8 billion for the bad investment), and a new, more cost-efficient online grocer effort will become the front-and-center segment to watch.
In the meantime, there are rumors that Buffett is looking to up his holding to 10% — a vote of confidence that is second to none in the investment world.
Keep an eye on a profit turnaround and the sales figures for the Express stores in the coming quarters, and as always, only invest in that which you are comfortable and knowledgeable.
The article Is the Worst Over for This Buffett-Backed Grocer? originally appeared on Fool.com and is written by Michael Lewis.
Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Berkshire Hathaway and Tesco.
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