Tesco takes a hit as shoppers cut back

Published on Thursday 6 October 2011 01:56

Signs of belt-tightening among UK consumers intensified yesterday as Tesco posted one of its biggest-ever quarterly falls in sales, while rival Sainsbury’s reported pedestrian growth.

The muted trading figures suggest that shoppers have been cutting back on groceries, traditionally the most resilient area of spending, as disposable incomes are squeezed by inflationary pressures, muted wage growth and the government’s austerity drive.

Tesco, which last week launched its £500 million “Big Price Drop” campaign to lower the costs of thousands of items, said UK like-for-like sales excluding VAT and petrol fell 0.9 per cent in the three months to 27 August, a sharp deterioration on the 0.1 per cent decline seen in the previous quarter. Across the first half as a whole, takings were 0.5 per cent lower.

It marks the group’s worst UK underlying sales performance since the early 1990s, when the country was gripped by recession.

Britain’s biggest retailer, which takes more than £1 in every £10 spent in UK stores, admitted its like-for-like result was worse than planned, but claimed it was “a robust performance in the most challenging retail market we have seen for a generation”.

Its total UK sales, which include VAT, petrol and the benefit of store openings, grew 7.1 per cent to £23.4 billion during the half-year.

Trading profits from the UK business rose 4.5 per cent to £1.3bn, but the group expects them to flatten out in the second half.

Tesco’s finance chief Laurie McIlwee said “the UK consumer is hit very hard at the moment”.

Chief executive Phil Clarke noted higher petrol prices had taken a particularly heavy toll on shoppers, with customers spending an extra £750m on filling up their cars in the first half, compared with the same period last year.

The tough domestic trading was offset by Tesco’s expansion in faster-growing Asian markets and reduced losses at its US chain Fresh & Easy.

Its interim results came as Sainsbury’s – Britain’s third-largest supermarket operator behind Tesco and Asda – said its sales rose by 1.9 per cent on a like-for-like basis, excluding fuel but including VAT, in the quarter to 1 October.

Chief executive Justin King said general merchandise and clothing continued to do well, with sales “well ahead” of the core grocery business. He warned that the market environment would “remain very competitive for the foreseeable future”. Shares in the retailer rose as analysts marked it up as a robust performance.

Tesco also confirmed yesterday that it would “slow down the introduction of new products” at its Edinburgh-headquartered banking operation as it switches to a different IT platform.

The bank has increased its provision to cover the mis- selling of payment protection insurance by £57m to £92m. This reduced profits at the division by 65.9 per cent to £44m, although revenues increased 10.1 per cent to £522m, with growth in savings, credit cards and motor insurance customers.

Tesco will pay an interim dividend of 4.63p per share, up 5.9 per cent on last year.

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