Dec. 2 (Bloomberg) -- Tesco Plc, the U.K.’s biggest supermarket company, reported third-quarter sales growth that beat analysts’ estimates after introducing a cheaper product range to combat discounters Aldi Group and Lidl.

Tesco rose 13 percent, the most since at least 1988, in London trading. Sales climbed 2 percent at U.K. stores open at least a year excluding gasoline, the Cheshunt, England-based company said today in a statement, beating the 1.6 percent median estimate of 10 analysts surveyed by Bloomberg.

The addition of a new range of discount goods in September helped attract new customers, though it led to price deflation, Finance Director Andrew Higginson said by telephone. Britons are looking to save money as the economy, which shrank last quarter, heads for its first recession since 1991. Tesco’s sales growth was the slowest since the fiscal year that ended in 1993.

“Tesco has defied the laws of gravity, kicking market recessionary fears firmly in the teeth,” Howard Wheeldon, senior strategist at BCG Partners, said in a note. Still, “the need to discount prices heavily may yet bear a burden on profits.”

Tesco made price cuts in September it said were worth 100 million pounds ($148 million). The food retailer carried out more reductions last month on products from Dairy Crest Group Plc’s Cathedral City cheese to the Pampers diapers made by Procter & Gamble Co. Same-store sales in the U.K., including gasoline, rose 3.2 percent during the quarter.

Shares Gain

Tesco also said today it plans to reduce capital spending next year to less than 4 billion pounds from about 4.5 billion pounds in the current fiscal year. It “won’t need to tap the debt markets” as a result, Higginson said.

Tesco rose 37.4 pence to 325.4 pence, posting the third- biggest gain in the Dow Jones Stoxx 600 Index of European companies. The stock has slid 32 percent this year, less than the 35 percent drop by smaller rival J Sainsbury Plc, which said last month that first-half same-store sales rose 3.9 percent excluding gasoline.

Customers have been “very cautious” since September, and Tesco expects next year to be “difficult,” Higginson said. The company’s long-term goal for U.K. sales growth of 3 percent to 4 percent “is still intact,” he said, adding, “as we go into a recession, we expect it to be tougher than that.”

The retailer is “comfortable with where forecasts are,” Chief Executive Officer Terry Leahy replied in an interview broadcast on Tesco’s Web site when asked about the outlook for profit.

Fresh & Easy

Total sales rose 12 percent and gained 28 percent at foreign stores. That included a “particularly strong performance” in Asia, where sales climbed 29 percent, while the retailer recorded “strong growth” in all of its European markets.

Tesco said it will “maintain rather than accelerate” the pace of store openings in the U.S., where it operates the Fresh & Easy chain. The chain’s first stores “have now moved strongly into like-for-like growth,” the statement shows.

“We are obviously being more cautious” in the U.S., Higginson said. “It’s a very tough environment.”

The company said it has “sufficient funding in place to achieve planned growth.”

U.K. consumer spending fell the most since 1995 in the third quarter as the economy slid toward a recession, crippled by the financial crisis. British retail sales declined for a second month in October as shoppers pared their spending, the Office for National Statistics said last month.

Market Share

Tesco controlled 30.9 percent of the U.K. grocery market as of Nov. 2, researcher Taylor Nelson Sofres Plc’s latest figures show, down 0.4 percentage point from a year earlier. Aldi, which said last month it will spend 350 million euros ($438 million) to expand in Ireland, increased its share to 3 percent, climbing for at least a fifth month in a row.

Aldi and other “hard” discounters typically keep costs down with steps such as stocking narrower ranges of goods than other grocers and scrimping on signs and lighting. They aim to offer better value than Tesco, whose new discount range includes the likes of 160 Packers Best tea bags for 1.69 pounds.

Tesco’s third-quarter U.K. sales growth compared with an increase of 4 percent in the prior three months.

To contact the reporter on this story: Louisa Nesbitt in Dublin at lnesbitt@bloomberg.net.

Last Updated: December 2, 2008 11:59 EST