British retailer Tesco posted one of its biggest-ever falls in underlying sales today, as customers cut back on groceries as disposable incomes are squeezed by rising prices, muted wage growth and a government austerity drive.
The news was gloomy for the Britain's fragile economic recovery; household spending accounts for about two-thirds of gross domestic product.
"UK customers, obviously, are having a very tough time," Tesco finance director Laurie McIlwee told reporters, warning second-half UK profits would be broadly flat after the group moved last month to invest £500 million in cutting prices in an attempt to boost demand and stem market share losses.
For the business as a whole, Tesco said it was "broadly comfortable" with analysts' full-year profit forecasts.
Tesco, which takes more than one in every £10 spent in British shops, said sales at stores open for more than a year fell 0.7 per cent in its fiscal second quarter, excluding fuel and adjusted for changes in Vat sales tax.
That was the third successive quarterly decline and compared with a drop of 0.4 per cent in the previous quarter.
Tesco, which makes about two-thirds of sales in Britain, has been suffering more than rivals in its home market because it sells a larger proportion of discretionary goods, where shoppers have been cutting back most.
Sainsbury's, third in Britain behind Tesco and Wal-Mart Stores Inc's Asda, said its second-quarter sales rose around 1.1 per cent on a broadly comparable basis, helped by store extensions and its expansion into convenience stores, online shopping and non-food ranges.
With food prices rising around 5 per cent, however, that suggests shoppers are cutting back on the number of groceries they buy.
Tesco boss Phil Clarke said higher petrol prices had taken a particularly heavy toll on British shoppers, with customers spending an extra £750 million on filling up their cars in the first half compared with the same time last year.
At a group level, Tesco's weak performance in Britain was offset by its expansion in faster-growing Asian markets and reduced losses at its US chain Fresh & Easy.
The retailer said its operating profit rose 3.7 per cent to £1.77 billion in the 26 weeks to August 27th on a 7.8 per cent rise in sales to £31.8 billion, excluding Vat.
Analysts had forecast an operating profit of about £1.83 billion and sales of £31.9 billion.
The figures compare favourably with bigger international rivals Carrefour SA and Wal-Mart, which also face weak demand in their home markets.
Tesco, with around 5,400 stores in 14 countries, said profit rose 19 per cent in Asia, 4.5 per cent in Britain and 12 per cent in other European markets, while US losses narrowed to £73 million from £95 million the year before.
Mr Clarke, who succeeded long-serving predecessor Terry Leahy in March, has pledged to slash US losses this year and drive the business into profit by the end of fiscal 2013, as part of a goal to lift investment returns.
Reuters
