Tesco recovery put in doubt as UK business slides

Tesco’s £1 billion turnaround plans were called into question as the supermarket giant blamed the horsemeat scandal and poorly selling consumer electronics goods for a drop in sales.

Picture: Rob McDougall

Same-floorspace sales at its core UK business fell 1 per cent in the first quarter of Tesco’s financial year to 25 May. The decline came despite the group refurbishing hundreds of its stores and employing thousands of extra staff as part of a bottom-up revamp ordered by group chief executive Philip Clarke.

The turnaround programme, which Clarke insisted remained on track, followed a shock profit warning in early 2012, the first from the business in a generation.

Tesco revealed that Q1 like-for-like sales in Asia declined 3.8 per cent, mainly on the continuing impact of the regulatory restrictions on opening hours in South Korea to protect the nation’s homegrown retailers.

Tesco said its Chinese business suffered from “consumer concern over the bird flu crisis and weaker demand for pork products following a national food safety scare”. Sales in Thailand fell 3 per cent.

Economic headwinds in the likes of the Republic of Ireland and Czech Republic saw like-for-like sales in Europe fall 5.5 per cent.

Tesco Bank, meanwhile, which employs more than 2,000 people across its bases in Edinburgh and Glasgow, suffered a 2.3 per cent drop in revenues. This was partly due to reduced income from a previous link with insurer Direct Line.

More positively, total customer accounts at Tesco Bank have grown nearly 4 per cent since the end of Q1, 2012, and by 1.4 per cent in the latest quarter, driven mainly by growth in credit cards and loans.

Tesco said the “drag” on like-for-like UK sales growth “continues to be driven by our disproportionate exposure to consumer electronics”.

Clarke said the company would move out of unprofitable consumer electronics products, which “take up a lot of space and don’t make much money”, as part of a wider revamp of its general merchandise offer to higher-growth products with better profit margins.

The group said demand for frozen and chilled convenience food slumped in the quarter after it was forced to withdraw four beef products found to contain horse DNA. But Clarke added that public trust in the food retailing industry was being restored.

He put a gloss on the setback, saying Tesco had “appropriate and realistic objectives for the years ahead… despite a continued difficult economic environment for consumers”.

The latest sales slide disappointed the City following a 0.5 per cent bounceback in takings at the end of its last financial year. Share closed down 5.2 per cent at 345.6p.

John Ibbotson, director of retail consultancy Retail Vision, said: “These results go to show that, even with £1bn to throw at it, there are no guarantees.

“After a decent Christmas period, Tesco UK bombed during the first quarter. Declining non-food sales coupled with growing competition from a resurgent Sainsbury’s and discounters like Aldi have been a major drag on performance.”