Tesco figures set to show impact of store wars

TESCO is expected to reveal on Wednesday its biggest fall in underlying quarterly sales in its home market since at least the early 1990s as investors await news of the impact of the latest price war.

UK sales excluding fuel and VAT are tipped to have fallen 1.2 per cent in its second quarter in the face of fierce competition from its big four rivals. Sainsbury’s is thought likely to report a modest rise in underlying sales, helped by store extensions.

Tesco is suffering more than its competitors partly because it sells a higher proportion of discretionary non-food goods, an area where shoppers are cutting back most.

It announced a £500 million price-cutting campaign on 3,000 products last week aimed at kick-starting demand and stemming market share losses.

The Big Price Drop has been hailed as a boost for under-pressure households, but in the City it is also being seen as a signal that the supermarket retailer wants to “get its mojo back”.

Some experts think the move will have little impact because Tesco will fund most of the campaign by trimming its Clubcard loyalty scheme.

Others think rivals will have to respond, which could lead to a price war hitting profits across the sector – leaving Sainsbury’s vulnerable because it has less financial firepower than Asda and Morrisons.

Dave McCarthy at Evolution Securities said the Big Price Drop is the biggest sign yet that Tesco’s UK business faces “severe issues”.

He believes the price reductions are a step in the right direction but are “underwhelming” and Tesco’s rivals will breathe a sigh of relief.

“We suspect that unless Tesco cuts prices further, we will not see much impact once things have settled down and that Tesco will return to trend,” he said.

Despite the pressure, Tesco is benefiting from growth overseas, including Korea, Thailand, and China. The only blot is the US, where it hopes to break even by the second half of the 2012/2013 financial year, and Japan, which it is leaving.