Price of fuel sees shoppers cut back

TESCO reported a second consecutive fall in underlying UK sales yesterday and said that the rising cost of petrol is forcing consumers to cut back on grocery spend- ing.

The UK’s biggest grocer reported a 0.1 per cent fall in like-for-like sales during the 13 weeks to May 28, a slight improvement on the 0.7 per cent fall in the previous quarter, but short of City hopes.

Total UK sales rose seven per cent, but this includes fuel sales, VAT and the impact of new store openings.

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Tesco, which is the world’s third biggest retailer, said rising prices and Government cutbacks have hit UK shoppers.

Tesco’s finance director Laurie McIlwee said that while cutbacks aren’t helping consumers, they are feeling most pressure from rising petrol prices and utility bills.

“Nothing’s getting worse, but it’s not getting significantly better,” he said.

Tesco, which makes about two thirds of its sales and profits in Britain, said like-for-like non-food sales fell about five per cent, with a drop in demand for electrical goods outweighing a better performance in clothing, toys and leisure goods. Liberum analyst Simon Dunn described the first quarter as “quite disappointing given that it includes the April bonanza”, referring to the surge in demand during a sunny Easter and the royal wedding.

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Food sales performed well, with meat, fish and poultry recording good UK growth.

The group was boosted by strong demand for its upmarket foods as customers cut back on dining out.

Tesco’s upmarket Finest range reported a 10 per cent increase in like-for-like sales as hard-pressed consumers sought alternatives to going out to a restaurant.

Tesco’s new chief executive Phil Clarke said the company had made a good start to its financial year despite some markets remaining subdued.

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“Uncertainties remain but, with early encouraging signs of better performance emerging in both the UK and the US, I am confident that this start will provide the platform for another year of growth.”

The group said that UK customers are having to switch some of their spending to petrol at the expense of their normal shopping, which remains a drag on underlying growth.

However, the company said the UK business continues to grow faster than the industry as a whole as its new stores help to offset weak demand in general merchandise.

The company’s fast-growing Asian business continued to offset weak domestic demand, posting a 3.2 per cent like-for-like sales growth from 1.9 per cent the previous quarter, driven by a strong show in Thailand.

Total group sales including fuel were up 7.8 per cent.

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In Europe, like-for-like sales growth slowed to two per cent in the first quarter from 2.4 per cent growth the quarter before, as gains in Turkey and central Europe were offset by a weaker trend in Ireland. The Fresh & Easy business in the US reported 11.1 per cent like-for-like sales growth as the company continued to attract new customers and a higher average spend.

Mr McIlwee said new store openings in northern California were particularly pleasing.

Tesco is aiming to drag Fresh & Easy into a profit by the end of its 2012-13 financial year after years of heavy losses.

Dave McCarthy, analyst at Evolution Securities, said he remained cautious after Tesco’s “lacklustre” UK performance.

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“Tesco’s update does little to reassure underperformance in the UK is set to improve in the near future, with UK like-for-like sales still negative,” he said.

Tesco, which is ranked third after Carrefour and industry leader Wal-Mart – Asda’s parent company – by annual sales, is benefiting from strength in Asian markets such as South Korea, China and Thailand.

Analyst Clive Black at Shore Capital said that with group sales growth coming in at 7.8 per cent including petrol and 6.7 per cent ex-petrol, Tesco is just about the fastest growing international food retailer in the world as most of its peers are experiencing annual sales growth in the one to five per cent range.

“Within the quarter we believe that April will have been strong, supported by good weather, Easter and an extra bank holiday, but March and May weak,” said Mr Black.

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