‘Bad day’ for grocery sector as Tesco results stun the market

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TESCO sent chills through the grocery market with a shock profits warning yesterday, sending shares crashing throughout the sector on fears the contagion could spread.

Analyst Dave McCarthy at Evolution said: “This is a bad day for Tesco and for the sector.

“We suspect that when investors look back, they will view this day as the day the market recognised the fundamental changes that are taking and have taken place.

“Today is Tesco Thursday. We have now entered a new era of weak/negative like-for-like sales, falling industry profits and falling industry returns.”

Tesco reported its worst Christmas in decades, resulting in the biggest one-day fall in Tesco’s stock since 1988.

Tesco’s chief executive Phil Clarke said 2012/13 operating profits will be flat, against expectations of a 10 per cent rise.

Tesco is expected to invest hundreds of millions in improving its fresh food offer as well as making the shopping trip more attractive for customers.

It will also invest in staff and better products as well as continuing a price-cutting campaign launched in September.

Tesco declined to say how much the investment will be worth.

“There is a real determination to step change the performance of the UK business,” said Mr Clarke.

“The focus is now on improving the shopping trip for customers.”

He added that he was disappointed over UK Christmas trading after the group had made such a big effort to get the pricing right.

In hindsight he said the company should have gone harder on promotions and coupons.

“We chose not to run a barrage of coupons as others did.”

Tesco will cut back openings of its big superstores and will channel sales of non-food items through the internet instead.

“Stores will be largely food with some complementary non-food and the internet will take up general merchandise, such as clothing and electronics,” said Mr Clarke.

Tesco is also keen to develop its ‘click and collect’ service which allows shoppers to order online and pick up from their local store.

Tesco, which accounts for one in every £10 spent in British shops, said like-for-like UK sales fell 2.3 per cent, excluding fuel and VAT sales tax, in the six weeks to January 7.

Analysts were forecasting a 0.9 per cent fall.

“It is not what I wanted for Christmas,” said Mr Clarke.

While some of the problems were due to Tesco taking its eye off the ball in its home market, others were due to pressures on the UK consumer.

Tesco group sells a higher proportion of discretionary non-food goods such as clothing and electrical items than rivals such as Morrisons and Sainsbury’s.

Talking about the outlook for 2012, Mr Clarke said it would be broadly the same as 2011. “I cannot see it being any better,” he said.

Some of Tesco’s disappointing sales performance was also due to its ‘Big Price Drop’ campaign in September.

While this attracted extra customers, it didn’t spur sales enough to offset the drop in takings.

Analyst Clive Black, at Shore Capital, said: “Whilst today’s update is a major disappointment, the downgrades (from ‘buy’ to ‘hold’) reflect not just poor recent trading but a build-up of matters, particularly in the core chain.”

Mr McCarthy said: “The outlook is not good, the timescale for recovery will be greater than suggested and that we are likely to see further cuts to forecasts in the future – for Tesco and the industry. This is not the end of the problem, this is the start of a new era for the industry.” Tesco said group sales rose 5.2 per cent, helped by growth in Asia, eastern Europe and the US.

Tesco, with over 5,300 stores in 14 countries, said on Tuesday it was mothballing 12 stores at its loss-making Fresh & Easy business in the US due to weak local economies, adding it remained committed to the chain.

Panmure analyst Philip Dorgan said the stakes could not be higher, as weakness in Britain could undermine Tesco’s expansion in faster-growing markets such as China and eastern Europe.

“This is the nightmare scenario,” he said, slashing his pre-tax profit forecasts by 15 per cent for 2012-13 and 2013-14.

“If the UK’s profits keep falling, then it will not be able to invest so much overseas.”