Tesco’s £1bn recovery plan paying off as slump halted

Tesco has instigated a £1bn recovery plan in a bid to reverse a steady decline in UK market share to rivals Leeds-based Asda, Sainsbury’s and Bradford-based Morrisons.

Yesterday Tesco ended 18 months of underlying sales declines with a tiny rise in its second quarter.

But this was overshadowed by Sainsbury’s, which reported a 31st consecutive quarter of underlying sales growth, beating analysts’ expectations.

Tesco said like-for-like UK sales rose 0.1 per cent in the 13 weeks to August 25.

Sainsbury’s said like-for-like sales rose 1.9 per cent in the 16 weeks to September 29, up from 1.4 per cent growth in the 12 weeks to June 9. Around one per cent of the latest increase was due to store extensions.

Sainsbury’s chief executive Justin King said the group received a boost from its sponsorship of the Paralympic Games.

“We’re delighted with the sponsorship and we see it as money well spent,” he said.

While he refused to be drawn on what financial gain the Paralympics might have brought, he said: “It will undoubtedly have helped as a backdrop.”

Mr King described the six-month period as a “game of two halves”. The first quarter was hit by the “unseasonal weather”, but the second quarter with the Olympics and Paralympics “really lifted the public mood”.

Sainsbury’s, which operates more than 1,000 stores, said sales were driven by a good performance from its top-end ‘Taste The Difference’ range, which reported near double-digit growth in the period.

Tesco’s chief executive Philip Clarke also said the group’s top-end ‘Finest’ range saw growth.

“Consumers are not eating out as much. People want affordable treats,” he said.

Sainsbury’s said non-food sales grew three times faster than food and sales of jeans doubled year-on-year following the launch of its Denim Shop.

An emphasis on the convenience store format – Sainsbury’s Local – continued as it opened 49 in the first half and continues to deliver its target of one to two per week.

Tesco’s £1bn recovery plan included hiring 8,000 extra staff and the relaunch of its budget range as Everyday Value.

The launch of Everyday Value involved the reformulation, modernising and repackaging of 550 products. Nearly 80 per cent of customers have bought Everyday Value since the launch and Tesco has added more than 100 new lines to the range.

Mr Clarke said sales have risen by 10 per cent since the relaunch.

The £1bn revamp was held responsible for much of the decrease in UK profits, which fell 12 per cent to £1.1bn in the six months to August 25.

Tesco’s international arm, once the driving force behind the group, reported a 17 per cent fall in profits to £378m as shopping restrictions in South Korea and the eurozone crisis hit sales.

Overall Tesco reported a 12 per cent fall in overall group pre-tax profits to £1.66bn.

“I wouldn’t say we’ve turned a corner, but we’re definitely on the road,” said Mr Clarke.

“The signs are encouraging, but this is a long course of treatment, not a single dose. There’s a long way to go.”

He added that Tesco is ending the space race – the hunt for huge supermarkets – and future growth will be in online and convenience stores.

He said that strong growth in the online grocery business and an increase in targeted offers, using the data collected through the Clubcard promotion, were behind the improved UK like-for-like performance.

The revamp has included 230 stores getting new signage, warmer colours and improved lighting.

Website sales rose 11 per cent on last year, while more than 70,000 customers have signed up to its delivery saver subscription service, which offers customers the option to pay for delivery charges up front at a discount.

Philip Dorgan, analyst at brokers Panmure Gordon, said Tesco’s UK recovery is “on track”, but it will take time. “Getting the UK back onto a recovery path is all about doing 1,000 things one per cent better, rather than having a wonderful store format that will save the company.”

Its US chain Fresh & Easy continued to be loss-making, losing £74m in the period, a 1.4 per cent improvement on last year.

Veteran takes up South Africa role

Richard Brasher, the former UK head of Tesco, has been appointed chief executive of South Africa’s second biggest grocer Pick n Pay.

Shares of Pick n Pay rallied nearly seven per cent after it said Mr Brasher, a Tesco veteran of 25 years, will take over in February, ending a roughly seven-month search for a new chief executive.

Mr Brasher will take charge of a retailer that has lost market share to domestic rivals and is now facing further pressure from Asda’s parent company Wal-Mart.

Mr Brasher left Tesco in July after a shock profit warning prompted group chief executive Philip Clarke to take a hands-on involvement in the UK business.