Introduction

During the past year, we have continued to build on the actions introduced in the 1993/94 financial year. Customers have responded to the initiatives, outlined in my statement last year, to provide better quality products, value for money, customer service, and more convenient stores. Our performance has improved accordingly. We describe in the following pages the new moves in these areas which we believe will continue to drive the business forward.

Performance

I am pleased with our strong performance this year. Customers' attitude to spending remained cautious and careful. Competition among food retailers remained intense. Against this background, group sales grew by 17.6%. In the UK, excluding Wm Low, sales in existing stores rose by 4.3% on the previous year and total sales improved by 12.9%. New stores' sales, net of closures, contributed 8.6%. Operating margins increased by 0.2%. Group profit before tax, excluding Wm Low integration costs and net loss on disposal of properties, rose by 12.7% to £595m. Financial performance is described in more detail in the Financial Review.

I believe that these results show that there is still much scope for growth in food and grocery retailing in the UK for those who read market trends accurately and trade flexibly. The key, as ever, is to listen to customers and to try to anticipate their requirements, their likes and dislikes. We introduced a number of new initiatives to give customers what they tell us matters to them. New Deal pricing (which keeps down prices on about 100 staple products) and One in Front checkout service (an undertaking to cut queues) are two of the most important.

Clubcard

Tesco Clubcard, which we launched nationwide in February, will provide us with a new and more sensitive way of listening to customers and giving them better service. The Clubcard is a thank you to regular customers, giving them a discount based on the amount they spend and extra benefits which go with membership of the club. The technology underpinning the scheme analyses members' shopping and will, over time, enable us to understand their shopping patterns much more precisely. The Clubcard was very popular in the 14 stores where it was trialled before we extended the scheme. Early results show that it is equally popular with customers throughout the country.

Store development programme

Our store development programme over the past year has seen 35 new stores opened, which increased retail floor space by 830,000 sq ft. These comprised 12 superstores, 15 compact stores (supermarkets with sales area less than 26,500 sq ft), 6 Metros and 2 Express stores which traded successfully in their first year. The flexibility provided by these formats has enabled us to adapt to the Government's changes in planning policy which seek to encourage new retail development in town centres. We have been successful in opening stores in areas where there was no previous Tesco representation. This has been largely as a result of careful consultation with local people. They, in turn, continue to welcome the new jobs created and the new stores themselves - most with flat, convenient car parks which make bulky food shopping easier and faster. Next year's opening programme is available here.

We have also continued to invest in our existing stores. We have carried out major refits in 19 stores to improve their design and layout. In some, we have reshaped the retail floor space to include new departments such as home entertainment and clothing by extending the sales area into unused warehouse space. This has been possible only through continued improvements to the distribution and stock control systems which mean that stores need to hold less stock. Wm Low As the figures in the previous paragraphs show, Tesco has achieved real organic growth during the past year.

Acquisitions

The acquisition of the Scotland-based Wm Low chain in September also enabled us to expand the business. The integration of the company into Tesco has taken place smoothly and efficiently, and we are delighted with the improvements in turnover. In acquiring a well-established and well-respected Scottish company, we wanted to retain the very best aspects of its business while introducing Tesco pricing systems, technology and economies of scale. We set up customer panels at each store and found out what customers thought about product ranges, customer service and store design, before we made any changes. I want to thank former Wm Low staff and Tesco colleagues who have worked so hard to make this such a successful process. Europe This has also been a year of progress for Catteau in France. Sales growth in the continuing recession was helped by the introduction of retail management structures and new operating systems. Catteau opened 11 new stores and extended its operations south, towards Paris, for the first time. We appointed Philippe Catteau as Chief Executive in February, following the retirement of Jean and Jacques Catteau. In Hungary, there has been good progress for Global. The first store under the Tesco name was opened in Szombathely, bringing the total number of stores to 44.

Board appointments

Looking to the future, Terry Leahy has been appointed to the post of Deputy Managing Director and I welcome to the Board Lesley James, who will be responsible for Human Resources, and Tim Mason, our new Marketing Director.

Dividends

The Board has proposed a final net dividend of 5.9p per share. The total dividend for the year therefore amounts to 8.6p, an increase of 11% over last year.

Current trading

Clubcard was launched on 13 February, just two weeks before our year end. We are pleased that, for the first seven weeks since the launch, we have achieved sales from existing stores running in excess of 7% above last year and total sales growth of over 16%. These figures exclude Wm Low, where we continue to see growth of over 20% on last year.

Conclusion

This has been a good year for Tesco - one of the best in recent years. In a tough climate, we not only dealt effectively with short term competitive issues, but we also laid some important foundations for our future development. Our achievements are a direct result of the commitment and motivation of all our staff. They have done an excellent job everywhere in the business. The skill and innovation of the buyers have increased trade; distribution have coped well with the increased volume which has resulted; the stores have taken this expansion in their stride and continued to improve customer service; and the property and estates department has managed the changing demands and challenges presented. Our suppliers have also responded well to new requirements and we are very grateful for their support.

We are approaching cash neutrality in 1995/96 and this will give us the capacity over the coming years to maximise opportunities in the core food business and related markets in the UK, and develop the business in Europe. The Board will continue to place emphasis on dividend growth.

My Board colleagues and I feel confident about the varied avenues for growth which we are exploring in the UK. In Continental Europe we will strengthen Catteau and Global in France and Hungary and, when the time and opportunity are right, we will look at opportunities to expand through further acquisition. I believe that Tesco will continue to offer customers, shareholders and employees excellent value and excellent prospects.

Sir Ian MacLaurin - Chairman