Tesco recovery in doubt as UK sales resume slide

Wed Jun 5, 2013 8:59am EDT
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By James Davey

LONDON (Reuters) - Tesco (TSCO.L: Quote), the world's No.3 retailer, has posted a drop in quarterly underlying sales in its main British market, resuming a trend seen for most of the past three years and raising doubts about its 1 billion-pound ($1.5 billion) turnaround plan.

Shares in the supermarket group fell up to 4.9 percent on Wednesday after it said it had suffered from weak demand for general merchandise as cash-strapped Britons cut back on discretionary purchases in a flagging economy, as well as the fall-out from Europe's horsemeat food contamination scandal.

Some analysts, such as Investec Securities' Dave McCarthy, have questioned whether Tesco can maintain its UK operating profit margin of 5.2 percent, even though the company said in April it believed that rate was sustainable.

Tesco, which makes about two thirds of its revenues in Britain, has struggled more than many rivals in part because it sells a higher proportion of non-food goods than other grocers and also because of years of underinvestment that saw it lose ground to rivals like J Sainsbury (SBRY.L: Quote) and Asda (WMT.N: Quote).

Philip Clarke, chief executive since 2011, has tried to rectify that by investing 1 billion pounds on more staff, new food ranges, revamped stores and lower prices.

However, sales at Tesco's UK stores open over a year, excluding fuel and VAT sales tax, fell 1 percent in the 13 weeks to May 25, at the bottom end of analysts forecasts for a fall of between 0.5 and 1 percent and reversing a rise of 0.5 percent in the previous quarter, which was the strongest quarterly result in three years.

"These results go to show that even with 1 billion pounds to throw at it, there are no guarantees," said John Ibbotson, director of retail consultants Retail Vision.

EBB AND FLOW   Continued...

A customer leaves a Tesco store in Hammersmith, west London October 3, 2012. REUTERS/Paul Hackett