Is the Worst Over for This Buffett-Backed Grocer?

In the cutthroat grocer business, a vote of confidence from a big-time investor goes a long way. If that vote of confidence comes in the form of a billion-dollar investment from Warren Buffett, then it becomes a saving grace. U.K.-based grocery giant Tesco (LSE: TSCO  ) has faced difficult headwinds in recent years, losing market share to competitors and navigating an anemic European economy. Its U.S. branch, called Fresh & Easy, caused company profits to drop 96% and led management to pull the curtains on the five-year-old chain. For Tesco, there's plenty of bad news, but many investors still have faith that the Oracle of Omaha sees something here. Should you be looking at Tesco?

Do you know Tesco?
Though not a household name in the United States, Tesco is the largest retailer in the United Kingdom. It is a behemoth of a company -- many times the size of Whole Foods Market and Safeway, or any other U.S. grocer, with the exception of Wal-Mart (NYSE: WMT  ) . It may be in part that Tesco resembles a smaller, younger version of the latter that Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) owns more than 5% of the outstanding shares. Buffett often talks about his biggest mistake in investing -- not buying Wal-Mart 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 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 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. 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.

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