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Tesco U.K. Sales Fall as Grocer Loses Ground to Discounters

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Dec. 4 (Bloomberg) -- Tesco Plc, the largest U.K. retailer, said a decline in domestic sales resumed in the third quarter as shoppers tightened their purse strings and turned toward both discount grocers and more upscale competitors.

Britain’s grocery market has become “more challenging for everyone since the summer” due to pressure on household finances, Chief Executive Officer Philip Clarke said today on a conference call after Tesco reported a 1.5 percent drop in U.K. same-store sales, matching estimates. Still, he said Tesco is performing “in line with market expectations” for the year.

The revenue decline marked a deterioration from the second-quarter’s stagnation, also showing that the supermarket owner is struggling to contend with the expansion of discounters Aldi and Lidl and of the upscale Waitrose chain. A 1 billion-pound ($1.6 billion) investment in staff, revamped stores and price promotions has failed to restore growth, while revenue sinks in countries such as Thailand and South Korea.

“Tesco has not managed to break the constraint of subdued revenue growth,” Clive Black, an analyst at Shore Capital, said in a note. “That said, we are relieved that full-year expectations as guided by the company remain intact.”

The shares rose as much as 3 percent to 352 pence and traded little changed at 341.9 pence at 9:21 a.m. in London, having fallen about 6 percent in the past month before today on concern that sales may be worsening at home and beyond.

‘Challenging Conditions’

In Europe, sales at outlets open at least a year fell 4 percent in the third quarter, Tesco said today, as shoppers from Dublin to Bratislava shunned the stores. In Asia, same-store sales declined 5.1 percent.

Tesco’s U.K. business has slowed since September, in line with the rest of the market, Clarke said, citing lower household incomes as a result of increases in energy bills.

Having scrapped 100 major store developments earlier this year, the grocer refrained from seeking “short-term relief” by accelerating the pace of openings, he said. Instead, Tesco is seeking to give customers “a shopping experience that fits their needs,” by expanding its online and convenience offers.

That’s allowed the likes of Aldi and Lidl to gain some share “from a small base,” Clarke said.

Aldi’s share of spending rose to 3.9 percent in the 12 weeks ended Nov. 11 from 3 percent a year earlier, researcher Kantar Worldpanel said this month, while Lidl’s share rose to 3 percent from 2.7 percent. All of the U.K.’s four big food retailers lost share for the first time since records began.

Budget Chains

Tesco isn’t dismissing the threat posed by discounters, Clarke said. The budget chains are “doing very well,” he said.

At the other end of the spectrum, Waitrose is also gaining customers as shoppers place greater value on food provenance.

Tesco’s plans are “very much on track” and the retailer is “confident that we can all we need to do and have a margin that’s delivering for shareholders,” Clarke said.

Analysts at HSBC Securities this week advocated that Tesco should slash prices, “destroying competitors’ cash flows and profits.” The grocer could justify cutting its operating profit margin to 2 percent to 3 percent from 5.2 percent, HSBC analyst David McCarthy said in a note, as it should be able to recover more quickly than the competition. “Without radical action Tesco’s long-term margin may be eroded in any case,” he wrote.

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Paul Jarvis in London at pjarvis@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net