Tesco may report drop in sales after £500m price blitz

Tesco has suffered more than rivals such as Leeds-based Asda, London-based Sainsbury’s and Bradford-based Morrisons because it sells more discretionary non-food goods where shoppers have been cutting back the most.

The group, which takes about one pound in every £10 spent in UK shops, hit back in September by cutting prices.

While it is confident the £500m investment will win customers and eventually boost revenues, analysts think the short-term impact will be to depress sales.

Analysts are forecasting that like-for-like UK sales, excluding fuel and VAT sales tax, could be down by one per cent for the 13 weeks to November 26, Tesco’s financial third quarter.

That would compare with a drop of 0.9 per cent in the second quarter and with increases reported by its rivals.

Analysts will be looking for clues on the strength of consumer spending running into the key Christmas trading period following a string of profit warnings from companies such as French Connection, Game and Blacks Leisure.

Tesco, which trails France’s Carrefour and US leader Wal-Mart by annual sales, makes around two thirds of its sales and three quarters of its profit in Britain.

The group, with over 5,300 stores in 14 countries, has been relying on strong growth overseas, particularly in Asia, to boost sales and profit in recent quarters.

Analysts expect group sales to have risen by a high-single digit percentage, which would be broadly comparable with the increase posted by Wal-Mart and ahead of Carrefour and Germany’s Metro.

Store groups are struggling as shoppers’ disposable incomes are squeezed by rising prices, muted wages growth and government austerity measures, and as they worry the euro zone debt crisis will plunge the region back into recession.

Tesco’s sales growth in Asia may have been dented by flooding in Thailand, which is Tesco’s second-biggest international market behind South Korea.

Tesco shares have outperformed the STOXX Europe 600 retail index by four per cent this year.

They trade at 11.3 times forecast earnings, below Wal-Mart, Carrefour and Morrisons, but above Sainsbury’s.