June 14 - Tesco, the world's No.3 retailer, missed forecasts with a second consecutive quarterly fall in underlying sales in its main UK market, as rising prices and government cutbacks hit shoppers.

Tesco store in China (Photo: Corbis)

The supermarket group said on Tuesday sales at British stores open over a year fell 0.1 percent, excluding petrol and changes in VAT sales tax, in the 13 weeks to May 28, its fiscal first quarter.

That was better than a 0.7 percent decline the quarter before, helped by strong demand for upmarket foods as Britons cut back on restaurant meals, but below analysts' average forecast for a 0.6 percent increase, according to a Reuters poll of 12.

Weak consumer spending in Britain is raising fears about the strength of the country's economic recovery and prompting questions about the speed of the government's plans to slash its deficit.

Tesco finance director Laurie McIlwee said that while government cutbacks were not helping consumers, they were feeling most pressure from rising petrol prices and utility bills.

"Nothing's getting worse. (But) it's not getting significantly better," he told reporters on a conference call.

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 percent, with a drop in demand for electricals goods outweighing a better performance in clothing and strength in toys and leisure goods.

"Quite disappointing given that it includes the April bonanza," said Liberum analyst Simon Dunn, referring to the surge in demand during a sunny Easter and the royal wedding.

At 0800 GMT, Tesco shares were down 0.8 percent at 404 pence, underperforming a 0.4 percent rise on the STOXX Europe 600 retail index .SXRP. The shares have lagged that index by 3 percent this year, in part because the group is more exposed to discretionary non-food purchases than UK rivals and also due to doubts about some of its performances overseas, particularly the United States.

Analysts expect J Sainsbury, Britain's third-largest grocer behind Wal-Mart's Asda and Tesco, to report on Wednesday a 1.3 percent rise in underlying sales for the 12 weeks to June 11.

Separately, British mobile phone retailer Carphone Warehouse and U.S. partner Best Buy said on Tuesday they were evaluating the next steps for their UK megastores business, which some analysts think could be closed down.

IMPROVING OVERSEAS

Tesco, which runs over 5,000 stores in 14 countries, said group sales rose 6.7 percent excluding petrol, helped by a strong performance from newly-opened stores and improving results in most of its foreign markets compared with the quarter before.

Shore Capital analyst Clive Black said that made the firm "just about the fastest growing international food retailer in the world," with most of its peers -- which include U.S. giant Wal-Mart, France's Carrefour and Germany's Metro -- seeing growth of between 1 percent and 5 percent.

Tesco, which trails Carrefour and industry leader Wal-Mart by annual sales, is benefiting from strength in Asian markets, like South Korea, China and Thailand, where like-for-like sales growth picked up to 3.2 percent from 1.9 percent the previous quarter.

Like-for-like sales in other European markets were up 2 percent, slowing from 2.4 percent growth the quarter before due to worsening conditions in Ireland.

Underlying sales in the United States were up 11.1 percent, improving on the previous quarter, and McIlwee said new store openings in northern California were particularly pleasing.

Tesco is aiming to drag U.S. chain Fresh & Easy into a profit by the end of its 2012-13 financial year after years of heavy losses.

The group said its outlook and expectations for the full financial year remained unchanged.

By Mark Potter
(Editing by Kate Holton, Andrew Callus and Sophie Walker)