Tesco missed forecasts with a second consecutive quarterly fall in underlying sales in its main British market as cash-strapped shoppers there cut back on discretionary spending.

The supermarket group, which does not disclose the profit margins it makes in the Republic of Ireland, said today sales at British stores open at least a year fell 0.1 per cent, excluding petrol and changes in VAT sales tax, in the 13 weeks to May 28th, the first quarter of its financial year.

That was better than a 0.7 per cent decline the quarter before, but below analysts' average forecast for a 0.6 per cent increase, according to a Reuters poll.

Most of Britain's retailers are struggling as shoppers grapple with higher prices, subdued wages growth and cuts in public spending as the government seeks to slash its deficit.

Stores focused on discretionary purchases are being hardest hit, with household goods group Home Retail reporting a plunge in sales at its Argos chain last week.

Tesco, which makes about two thirds of its sales and profits in Britain, said like-for-like non-food sales fell about 5 per cent, slightly better than the previously quarter.

The retailers said it was benefiting from strength in Asian markets, like South Korea, China and Thailand, where like-for-like sales growth picked up to 3.2 per cent from 1.9 per cent the previous quarter.

Like-for-like sales in other European markets were up 2 per  cent, slowing from 2.4 percent growth the quarter before due to worsening conditions in Ireland where like-for-likes sales declined by 3.9 per cent.

Finance director Laurie McIlwee declined to comment on whether Britain's government was cutting spending too quickly.

However, he told reporters the biggest challenges facing shoppers were higher prices for fuel and utility bills.

Tesco, which runs over 5,000 stores in 14 countries, said group sales rose 6.7 per cent excluding petrol, helped by a stronger performance in most of its overseas markets compared with the previous quarter.

Like-for-like sales were up 2 per cent in other European markets, up 3.2 per cent in Asia, and up 11.1 per cent in the United States, where the group is aiming to break into profit by the end of fiscal 2012-13 after years of heavy losses.

Tesco lagged sales growth at major UK rivals over Christmas in part due to its larger exposure to discretionary non-food purchases.

New chief executive Phil Clarke also said the group needed to spruce up its non-food products and be more innovative.

Analysts expect J Sainsbury, Britain's third-biggest grocer behind Wal-Mart's Asda and Tesco, to report tomorrow a 1.3 per cent rise in sales on a comparable basis for the 12 weeks to June 11th.

Tesco, which trails France's Carrefour and US industry leader Wal-Mart in the world retail rankings by annual sales, said its outlook and expectations for the full year remained unchanged.

Its shares have lagged the STOXX Europe 600 retail index by 3 per cent this year. They trade at 11.2 times forecast earnings, below Sainsbury's on 11.7, Wal-Mart on 11.8 and Carrefour on 12.2, according to Reuters data.

Reuters