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By
Reuters
Published
Jun 2, 2014
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Tesco's UK sales' slide seen worsening

By
Reuters
Published
Jun 2, 2014

LONDON, United Kingdom - Tesco, Britain's biggest retailer, is expected to report on Wednesday its worst quarterly performance in its key home market since Chief Executive Phil Clarke took the helm in 2011. Price cuts and a weak food market are forecast to have hurt sales at the supermarket operator, raising further questions about Clarke's trading strategy.

He is two years into a turnaround plan for the British market which contributes two-thirds of sales and profit at Tesco, the world's third-largest retailer after Wal-Mart and Carrefour.

The plan has absorbed billions of pounds of investment in store refits, staff, product ranges and online services, and abolished a profit margin target, which was the highest in the industry, but has so far failed to deliver an improvement in underlying sales.

Analysts are forecasting sales at Tesco's UK stores open for over a year, excluding fuel and value-added tax, will be down 3.5-4.1 percent for the 13 weeks to May 24, the company's fiscal first quarter.

That would be worse than a 3 percent decline in the fourth quarter of Tesco's 2013-14 year and, according to analysts, would also be the weakest performance for over a decade. Tesco has not given a breakdown of quarterly results going back that far.

"At no stage in recent times do we believe that Tesco's management has been budgeting for like-for-like sales to be as weak as they may have been in recent months, even with guidance in April that same-store sales can be expected to be negative for some time," said Shore Capital analyst Clive Black.

If UK like-for-like sales are sustained at current levels further downgrades to profit forecasts can be expected, he said.

Analysts expect Clarke to stress Tesco is investing for the long term and emphasize that a weak overall grocery market, reduced promotional and vouchering activity and disruption from its store modernization programme hit business.

Price cuts are also likely to have hurt sales and will take time to be offset by volume gains, leading some analysts to question the effectiveness of the strategy.

Elsewhere, analysts also expect the group's performance in Asia to continue to be dragged down by South Korea where restrictions on store opening hours and a weak consumer backdrop are affecting business, and by Thailand, where political unrest is hurting sales.

Other European markets are expected to broadly maintain improvement seen in the previous quarter.

MIDDLE-MARKET SQUEEZE

Tesco's share price has hovered near 10-year lows as the group has been losing market share in Britain. The UK grocery market is growing at its slowest rate for 11 years, as stagnant wages keep consumer spending in check. At the same time, the market is seeing rising competition from discount chains.

In common with Britain's three other leading grocers – Wal-Mart’s Asda, Sainsbury's and Morrisons - Tesco has been squeezed between hard discounters Aldi and Lidl and Waitrose [JLP.UL] and Marks & Spencer at the premium end.

"It seems Tesco is stuck in the middle and investors could be questioning management’s strategy," said Cantor Fitzgerald analyst Mike Dennis.             

Clarke has vowed to win back shoppers with millions of pounds of price cuts and by accelerating the pace of change at larger stores.

The company said in February it would spend an additional 200 million pounds ($335 million) lowering prices for basic products and a similar amount on a fuel savings' scheme for holders of its Clubcard loyalty programme. A further round of price cuts was launched in April.

However, Asda and Morrisons have also pledged to cut prices, while Sainsbury's has vowed to remain competitive, raising analysts' concerns about a possible price war hitting earnings across the industry.

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