Tesco sales set to slip back despite recovery strategy

Tesco chief executive Philip Clarke
Tesco chief executive Philip Clarke
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Tesco, the world’s third biggest retailer, is expected to slip back to an underlying sales decline in the UK when it publishes quarterly trading next Wednesday, raising new questions over its recovery strategy.

Britain’s biggest grocer is still losing ground to rivals despite being 20 months into chief executive Philip Clarke’s turnaround plan for its main market.

Chairman Richard Broadbent said a turnaround would not be swift and dismissed talk of a management change.

Tesco, which trails France’s Carrefour and US number one Wal-Mart in global sales, has spent more than £1bn on store revamps, more staff, new product ranges and pricing initiatives.

Meanwhile, overseas markets that once provided a hedge against weak demand at home now appear to be more of a hindrance.

After failed attempts to break into Japan and the United States and a costly, still unprofitable, expansion into China, Tesco’s sales are falling in central Europe and other Asian markets.

In Britain, the latest monthly industry data showed that in common with other major grocers, Tesco is being squeezed by discounters Aldi and Lidl and upmarket grocers Waitrose and Marks & Spencer.

Analysts expect Tesco’s sales to have fallen 1 to 2 per cent at UK stores open more than a year, excluding fuel and VAT sales tax, for the 13 weeks to November 23, its financial third quarter, with an average forecast of a 1.7 per cent drop.

That compares with flat like-for-like sales in its second quarter and a 0.6 per cent decline in the same quarter last year, and will raise questions over the sustainability of a 5.2 per cent operating margin for the UK business that still contributes over two-thirds of group revenue.

With Tesco’s UK sales falling and other costs rising some analysts say it is only able to hold this operating margin by squeezing suppliers for better terms.

However, Tesco has said the changes it is making to its non-food offer, like selling a bigger proportion of higher-margin clothing, is benefiting its overall UK profitability.

Earlier this month Wal-Mart Stores’ Asda, battling with Sainsbury to be Britain’s number two grocer, reported a 0.3 per cent rise in third quarter like-for-like sales, albeit for a different time period.

On Tuesday, both of Tesco’s corporate brokers, Deutsche Bank and Barclays, cut their forecasts for the retailer’s profit in 2013-14 by 3 per cent.

Analysts’ average forecast for group trading profit in 2013-14 is £3.39bn, down from the £3.45bn made in 2012-13, according to Tesco’s website.

Mr Clarke is likely to highlight a weak UK grocery market and a continuing squeeze on shoppers’ incomes with inflation outpacing wage growth.