Sales fall adds to doubts over success of £1bn Tesco facelift

Tesco sign reported a fresh dip in quarterly sales.
Tesco sign reported a fresh dip in quarterly sales.
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TESCO reported a fall in third quarter sales, adding to the supermarket’s woes and casting doubt over the success of its £1bn UK revamp.

The UK’s biggest retailer said like-for-like UK sales fell 1.5 per cent in the 13 weeks to November 23, down from flat growth in the 13 weeks to August 24.

The figures mean that Tesco is trailing Sainsbury’s and Asda, which both reported positive underlying sales growth recently.

Only Morrisons, which has suffered from a lack of online shopping, has performed worse than Tesco with a 2.4 per cent decline in like-for-like sales in the 13 weeks to November 3.

Tesco blamed a weak UK market for the fall and said it will not be drawn into a price war following Asda’s announcement that it will invest £1bn in lowering prices over the next five years, nearly double the amount it is spending at the moment as it increases the pressure on major rivals to match its prices.

Instead, Tesco’s plan is based on selling a wider range of goods than its rivals from both supermarkets and online.

The company, which makes two thirds of its revenue in the UK, is 20 months into its £1bn UK turnaround plan and is pouring investment into store upgrades, extra staff, new product ranges and price initiatives.

John Ibbotson, director of retail consultants Retail Vision, said: “It looked like Philip Clarke’s billion-pound turnaround plan was beginning to work but this 1.5 per cent fall in UK like-for-like sales will call this into question.

“This, together with declining sales in key overseas markets, will put Mr Clarke and his senior management team under threat.”

Shore Capital retail analyst Clive Black said Tesco is six to nine months behind the targets he set for the business in February.

However, he added: “We still support the strategy, encourage management to keep focused upon improving the performance of its existing store estate whilst constraining capital expenditure on new stores and building out its online and digital capability.”

Tesco said it was performing in line with market expectations for its 2013-14 year.

It has not given a deadline for completing the revamp, saying there will be no immediate payback from a project that will reposition the company for the next decade.

Tesco’s chief executive Philip Clarke said the plan “is very much on track”.

“For us it isn’t about market share over a quarter or a half. It’s about delivering a business which is sustainable,” he said.

“Continuing pressure on UK household finances have made the grocery market more challenging for everyone since the summer and our third quarter performance reflects this.”

He said recent changes to the business, such as the relaunch of its Finest range and the refurbishment of more than 100 stores in the quarter, had been well-received by shoppers.

Its online business has also recorded a record level of grocery orders.

Tesco’s interim profits tumbled by almost a quarter in October to £1.39bn as a result of underlying sales declines in the UK and every one of its overseas markets.

As well as the squeeze on household spending power, Tesco has been impacted by the expansion of rivals in the discount sector.

Last week, Lidl said its like-for-like sales were growing at 18 per cent as it set out plans to more than double its 600-strong UK estate.

Analysts have suggested Tesco should cut prices to reclaim lost market share, even if it means sacrificing some profitability for now, but the company is determined to sustain a UK operating margin of 5.2 per cent.

Mr Clarke said the margin “isn’t holding us back” and that he was comfortable with it.

Last month market research group Kantar Worldpanel said all the “big four” were losing share for the first time in over a decade, while Aldi’s share was at a record high. Mr Clarke said the rise of the discounters was largely driven by new store openings.