Tesco reeling as it endures worst UK sales for 20 years

The supermarket sector has been relatively immune to the downturn as shoppers have switched from eating out to treating themselves at home, but a new austerity drive has taken hold.

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

Sainsbury’s chief executive Justin King added: “Our assumption is that the current state of affairs will persist for some time to come, partly because there’s no economic reason why consumers are likely to start to change their behaviour.”

Shoppers are cutting back on groceries, traditionally the most resilient area of spending, as their incomes are squeezed by rising food prices, low wage growth, the Government austerity drive and high petrol prices.

Tesco said UK second-half profits will be flat following its recent £500m investment in price cuts in a bid to boost market share, which fell from 30.8 per cent to 30.4 per cent in recent weeks.

Tesco described current trading conditions as being the toughest “in a generation”.

It said that UK sales excluding new store space, VAT and petrol fell 0.9 per cent in the three months to August 27, with electronics and entertainment products particularly badly hit.

The group reported a 12 per cent rise in underlying profits to £1.9bn in the half-year, boosted by a strong performance in Asia.

Sales rose nine per cent to £35.5bn.

Sainsbury’s said same-store sales including VAT increased by 1.9 per cent in the 16 weeks to October 1, the same increase as the previous quarter.

Measured in this way, Tesco’s sales would have been flat in the second quarter.

Sainsbury’s, which recently changed its slogan to ‘Live Well For Less’, described its performance as “good” in a tough consumer environment.

Total sales rose eight per cent, boosted by its 400 Sainsbury’s Local convenience stores, which saw growth of 20 per cent.

Dave McCarthy, an analyst at Evolution Securities, said: “This is not a bad performance from Sainsbury’s and puts it ahead of Tesco but behind Morrisons. Our overriding impression is that Tesco’s UK business remains disappointing and we are unconvinced that enough has been done to put it back on track.

“Management have said they expect flat second half profits, despite the £500m investment in price cuts and despite other improvements in service.”

Tesco, which makes about two-thirds of sales in the UK, has suffered more than rivals because it sells a larger proportion of discretionary goods, where shoppers have been cutting back the most.

Tesco’s underlying UK non-food sales slumped 4.8 per cent in the first half.

Tesco’s chief executive Phil Clarke, who took over from Sir Terry Leahy in March, said higher petrol prices had taken a particularly heavy toll on UK shoppers, with customers spending an extra £750m on filling up their cars in the first half compared with the same time last year.

Tesco said it still plans to create 7,000 jobs in the UK this year through its store expansion plans.

The group’s Big Price Drop has reduced the cost of 3,000 items in a bid to win back shoppers and arrest recent declines in market share, although it has been criticised for not being bold enough.

Tesco promised that there will be “more change to come”, but warned sales would not pick up immediately.

Sainsbury’s, British number three behind Tesco and Leeds-based Asda, said general merchandise and clothing continue to do well, with sales “well ahead” of the main grocery business.

In line with the consumer trend for local shopping, its convenience stores business continued to grow, with like-for-like sales stronger than in its supermarkets.

Sainsbury’s has responded to pressure on household finances by launching its ‘Live Well for Less’ promotion and said 3,000 new or improved lines were in store under its ‘by Sainsbury’s’ own label range.

Sainsbury’s will be eyeing a further boost to its clothing sales with the launch of a number of collections created by television presenter and fashion consultant Gok Wan under the Gok for TU brand.

His debut womenswear collection will be launched in 200 stores, featuring 13 styles with prices starting from £20.

A million are worse off

Over one million more households in the UK say they are worse off now than a year ago, according to Legal & General’s latest MoneyMood survey.

Legal & General estimated that 11.5 million homes, around half of all households in the UK, are in danger of sinking into debt.

In its August survey, over half of households questioned said they were considering eating into their savings to meet mortgage payments or pay higher food and fuel bills.

Mark Gregory, Legal & Gen-eral executive director savings, said: “People are saying that they’re struggling to cope with household bills. Our latest figures indicate over half of UK households are scrimping.”