Tesco cashes in on employment opportunities to fuel expansion

Tesco has signed up for welfare-to-work and is pulling out of France to go East. George Pitcher wonders if it’s anything to do with a low-cost workforce. George Pitcher is chief executive of issue management consultancy Luther Pendragon.

Tesco has long demonstrated that it has something of a grasp of the way things are moving in UK markets. Politically, too, its antennae look fairly acute – witness this week’s news that it will be one of the first to take a major initiative under the Government’s welfare-to-work programme.

The supermarket chain is no slouch when it comes to the Continent either, if its decision to quit the French market and concentrate on central Europe is anything to go by. Never shy of making a connection where others fear to tread, I reckon that policy in the UK may have greater relevance to what occurs abroad than immediately meets the eye.

Take the case of Tesco’s dip into the Treasury’s funds, recently replenished courtesy of the windfall tax on privatised utilities. The supermarket chain will start recruiting long-term unemployed in the new year in a pilot scheme at its Cheshunt HQ and in stores at Harlow, Stevenage and on Tayside. During a programme that can be expected to run throughout 1998, Tesco will, it hopes, provide some 1,500 jobs through the scheme.

Not all the recruits will be eligible for the welfare-to-work 60-a-week subsidy provided by the Government, but the TUC made it clear on Monday that the Tesco initiative is very much in keeping with what is now known as the New Deal programme, which means getting people back to work.

It’s all very laudable and one doesn’t want to spoil the party, but there are one or two points of concern that should be flagged up – if only so that we can compare them with experience in six or 12 months’ time.

The first is that the Government’s welfare-to-work scheme hinges on the proposal that corporate participants guarantee jobs for at least six months for people who have been unemployed already for at least that period.

Another, albeit cynical, way of looking at it would be to observe that these people could be returned to unemployment after six months, having collected the Government subsidy through their temporary employers and only equally temporarily having relieved the Government’s unemployment figures.

Furthermore, the 4bn raised for the scheme could be spent through companies that are expanding anyway. Again, Tesco is a case in point. Apparently last year Tesco expanded its workforce from 15,000 to 160,000 – testament to that vanguard spirit to which I have referred.

I appreciate that, on that performance and in an industrial climate where it is all too often seen as an act of corporate virility to be laying off swathes of staff, I should be congratulating Tesco, not sniping at it. But it would seem that Tesco is on an employment roll anyway and that welfare-to-work is simply providing a subsidy for jobs that were, in any case, being created.

Finally on this point, let us not forget whence this subsidy came. The 4bn windfall originated in the “excess” profits of the privatised utilities. Those of us – in fact, all of us – who have to suffer a restricted rate of growth from our suppliers of electricity and water, both in terms of capital investment in infrastructure and earnings from the share the Conservatives sold us, may wonder whether the money is better spent on jobs for shelf-stackers on Tayside.

I doubt that anybody will accuse Tesco of making “excess” profits as a result of the bonus welfare handout, but that’s worth considering too, since Tesco is obviously in such good working order at the moment.

Turning to Tesco’s French experience, the chain has decided to quit that market and is selling its 104-store Catteau chain to French retailer Promodes for some 225m, having acquired it for a little more than 175m four years ago. In a low inflationary environment, that’s not so bad, but presumably there is not much rejoicing in Cheshunt with regard to the capital employed. Still, for what turned out as a misguided geographical expansion, Tesco has left France with its shirt on.

It said it had to expand its market share in France to be a real player there and failed to acquire rival hypermarket Docks de France, which it regarded as demanding too high a price. All true no doubt, but note that the French government is also not handing out Frf600-a-week for Tesco to take on lumps of its unemployed workforce. Life is tough on Tayside, but – for Tesco at any rate – it’s tougher in France.

A cruel reflection, perhaps, but look where in Europe Tesco prefers to seek expansion opportunities. Step forward Poland, Hungary, Slovakia and the Czech Republic, where collectively Tesco has about 100 stores and where, evidently, it wants to develop many more.

I have no idea whether Tesco is eligible for or is a beneficiary of any of the myriad development funds that are available from the European Union for expansion in central Europe, but it is undoubtedly the case that the region not only offers untold retail market opportunities but also a comparatively cheap workforce.

I make no criticism here. Good companies seek out such opportunities for cost-effective expansion in markets with growth potential. I only raise the point that the most profitable of companies do not always need to exploit the most arduous markets – nor do they necessarily have to use their own money to succeed.

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