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U.K.’s Tesco begins fight back with cost cuts and asset sales

Tesco Plc Supermarkets Ahead Of New Year Strategy ReportTesco Plc Supermarkets Ahead Of New Year Strategy Report
Tesco needs the money back home to plug the hole in its pension plan and cut overall debt. Photograph by Chris Ratcliffe — Bloomberg via Getty Images

Britain’s biggest grocer Tesco PLC (TESO) plans to sell assets and cut hundreds of millions of pounds of costs to fund lower prices in store as part of its plan to fight back from the biggest crisis in its 95-year-history.

Seeking to recover from four profit warnings and an accounting scandal last year, new Tesco boss Dave Lewis unveiled his plan alongside a trading update showing a marked improvement in trading

Like-for-like sales at Christmas were down 0.5%, compared with a 4.4% fall in the previous three months.

With the company’s pension deficit and debt levels growing, Tesco said it would reduce its capital expenditure for next year to 1 billion pounds ($1.5 billion), from up to 2.1 billion pounds this year and cut costs by 250 million pounds a year.

It will also explore the sale of its Dunnhumby data business, not pay a final dividend and will consult on a plan to close its defined benefit pension scheme to all colleagues.

The group said the steps announced on Thursday were just the first in a drive to strengthen the balance sheet and further initiatives to increase shareholder value were under consideration.

Tesco also announced the appointment of Halfords Chief Executive Matt Davies as the new boss of its UK and Ireland business. Davies, who will start in June, is widely credited with turning around the bikes to car parts retailer.

“I am very conscious that the consequences of these changes are significant for all stakeholders in our business but we are facing the reality of the situation,” Lewis said in a statement. “There is more to do but we have taken the first important steps in the right direction.”

Britain’s biggest supermarket group, like rivals Asda (a unit of Wal-Mart Stores Inc. (WMT), Sainsbury’s and Morrisons, is losing sales to German discounters Lidl and Aldi, whose limited ranges of low-priced products are increasingly popular with British shoppers.

Tesco brought in Lewis in September to revive its fortunes but the former Unilever executive was immediately put on the back foot by an accounting scandal and profit downgrades.

The huge savings in costs and capital expenditure will enable Lewis to cut prices in stores. Earlier on Thursday the group, Britain’s largest private sector employer, announced price cuts to hundreds of branded products.