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    Tesco Declares Success with Fresh & Easy; Plans Digital Entertainment Portal

    The U.K.-based grocer said the top stores of its U.S. chain are posting weekly sales of $20 per square foot.

    British retailer Tesco PLC yesterday said sales at its U.S. chain Fresh & Easy Neighborhood Market are ahead of budget, with sales at the format's best stores exceeding $20 per square foot per week. It also said the U.S. stores division is on track to open a total of 150 new stores this year.

    "The breadth of the group and the strength of our business model have enabled Tesco to deliver another year of double-digit sales, profit and earnings per share growth - in challenging market conditions," Tesco chief executive Terry Leahy said during an earnings conference call. "We begin the new financial year confidently - with a good start in the UK, excellent progress in our established international markets and promising early performance from our investments in future growth, particularly in the United States, China, and Turkey."

    Tesco's net profit for the year ended Feb. 23 was #2.12 billion ($4.2 billion), up from #1.89 billion ($3.71 billion) the previous year. Annual sales, excluding value added tax, rose 11 percent to #47.3 ($92.9 billion) up from #42.64 billion ($83.7 billion) last year.

    Driving this success, according to Tesco, is its five-part strategy of becoming an international retailer; maintaining a strong core UK business; being as strong in nonfood as in food; developing its retailing services; and putting community at the heart of what it does.

    Here's how Tesco said the strategy is paying off, by the numbers:
    - International sales are up 25.3 percent; 50 percent of group profit growth is coming from international divisions, and Fresh & Easy is "well-received by customers, growing strongly"
    - Core UK sales are up 6.7 percent
    - UK nonfood sales are up 8.7 percent, and Tesco Direct is trading well
    - Tesco online sales up 30.9 percent, profits up 49.2 percent
    - Green efforts are on track to save 2 billion shopping bags

    Despite critics' claims, Tesco reported it is seeing strong growth its initial group of Fresh & Easy stores, as it steps up its marketing programs and build awareness of the brand. Fresh foods and own brand products have sold particularly well, said the retailer.

    This is not to say that the Fresh & Easy rollout hasn't hit and speed bumps. Tesco said that progress with real estate has been good, but that while it has secured enough sites for its immediate needs, the deteriorating property market, particularly in Arizona and Nevada, will defer some of the third-party developments in which it had planned to open prototype stores later this year.

    Startup costs for Tesco's U.S. unit were in line with its guidance, with costs of recruitment and training of staff for the stores, combined with the other pre-launch costs and initial trading losses resulting in a total loss of #62 million ($121.7 million). Tesco expects this number to grow to #100 million ($196.3 million) before it begins to decline as early stores begin to mature and it sees increased overhead recovery from higher volumes.

    Back at home, Tesco yesterday also launched Tesco Digital, an online portal that will offer a variety of digital entertainment products, beginning with a music download service and expanding into TV, films, and games.

    The portal launches next month with downloadable music, and iPod and MP3 players.

     "The new Tesco Digital site is more than a music download portal," said Graham Harris, commercial director at Tesco. "We wanted to create an exciting and easy-to-use entertainment shop that Tesco customers of all ages and technical ability can use and trust. We're starting out with a comprehensive music offering, but customers can expect downloadable TV and films as well as games to buy very soon."

    Tesco Digital will initially offer customers a choice of over 3.3 million music tracks, 1.6 million of those in MP3 format - with the added bonus of over a hundred free playable Flash games. The retailer plans to have all music on the site in MP3 format by the end of the year.

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