By Mark Potter
LONDON, Nov 19 (Reuters) - Tesco, Britain's biggest retailer, set its sights on capturing a bigger slice of the broadband and home phones market on Thursday as part of a drive to increase revenues from more profitable non-grocery markets.
The supermarket group, which is holding two days of seminars on its ambitions to grow in markets like telecoms and banking, said it had agreed a five-year deal with Cable & Wireless for the telecoms firm to supply it wholesale broadband services.
This will allow it to offer a more comprehensive range of products, including a combined broadband and home phone service for the first time which will step up its challenge to the likes of BT, TalkTalk and Virgin Media.
The deal is part of drive by Tesco, which takes about one in every three pounds spent in Britain's highly competitive grocery market, to tap new sources of often higher margin growth, whether abroad, online or in services like banking and telecoms.
In July 2008, when it bought Royal Bank of Scotland out of a financial services joint venture, Tesco set a target to double annual profits from retail services to 1 billion pounds ($1.7 billion) over an undisclosed period.
Retail services chief Andrew Higginson said on Thursday this meant investing more -- for example setting up in-store phone shops and bank branches -- but that this was paying dividends.
"Returns in retailing services are still higher than the group as a whole even with this significant recent investment -- and going forward the profit growth enabled by this investment will drive ROCE (return on capital employed) even higher," he said, according to slides on Tesco's Web site.
Tesco, the world's No.3 retailer behind France's Carrefour and U.S. market leader Wal-Mart, did not say how much it was investing, but said retail services operating margins and ROCE were 13 percent and 19 percent respectively in 2008-9 compared with group averages of 6 percent and 15 percent.
The group said its large store base -- it has about 4,300 across 14 countries, including around 2,300 in Britain -- and Clubcard customer loyalty scheme would allow it to expand quickly, and at less cost than many competitors.
It also expects to benefit from cross-selling products, noting that customers using two of its retail services spend on average four times as much in store as those who don't use any.
At 1400 GMT, Tesco shares were flat at 423.2 pence, beating a 1 percent fall in the DJ Stoxx European retail index.
TELECOMS, ONLINE
Tesco telecoms chief Lance Batchelor said customer turnover in Britain's fixed telephone and broadband markets, together worth around 8.8 billion pounds a year, was running at around 20 percent, creating a big opportunity for the group to grow.
It will double its number of in-store Phone Shops to 200 by the end of 2010, and with an eventual target of 500 it sees the potential to create a telecoms business making about 2 billion pounds a year in revenues and 200 million pounds in profit.
Laura Wade-Gery, head of the Tesco.com online business, saw similarly strong potential for her business, noting that while Internet sales are growing rapidly across Britain they still account for just 7 percent of total retail sales.
She said Tesco, which uses existing stores to serve online customers, was reaching capacity in some areas, and so was opening new stores dedicated to only serving Internet customers.
With two currently in operation, it plans to open a third next year and about one a year for the next few years, she said.
Tesco also plans to launch a grocery home shopping business in the Czech Republic next year, she added.
The group is due to publish presentations on its banking and insurance businesses on Friday. Banking chief Benny Higgins said on Tuesday he was not interested in buying assets from bailed-out banks Lloyds and RBS.
($1=.5946 Pound)
(Editing by Hans Peters, John Stonestreet) Keywords: TESCO/
(mark.r.potter@thomsonreuters.com; +44 20 7542-2943; Reuters Messaging: mark.potter.reuters.com@reuters.net)
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