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Tesco sales hit by poor non-food results

Hard-up households have stopped buying gadgets and homewares alongside their groceries as higher petrol costs force them to restrict spending to essentials, Tesco said on Tuesday.

The supermarket group blamed an unexpected fall in UK sales in the first quarter on the performance of its large non-food departments, where like-for-like sales were down about 5%.

Laurie McIlwee, Tesco's finance director, said higher fuel and utility prices were eating into disposable incomes and making extras like electricals "difficult to sell". He added: "Nothing's getting worse but it's not getting significantly better. Consumer sentiment is pretty much flat."

Weak consumer spending in Britain has raised fears about the strength of the economic recovery, and retailers with large household goods businesses are finding themselves in the front line.

Argos last week blamed a disastrous first quarter on a 20% plunge in sales of electricals – particularly televisions and video games – while Carphone Warehouse has delayed taking a decision about the future of its fledgling electronics chain Best Buy. It had been expected to announce the next phase of expansion on Tuesday but, with just 10 Best Buy stores open to date, some analysts now think the chain could be closed down.

The performance of Tesco's non-food division put a drag on the whole group's performance, with UK like-for-like sales down 0.1% for the three months to 28 May. Analysts expect that Sainsbury's – which has a smaller non-food division – will on Wednesday report a 1.3% rise in underlying sales for the three months to 11 June.

McIlwee said shoppers were doing less big grocery shops and staying closer to home, using Tesco's high street convenience stores rather that driving to out-of-town Tesco Extra hypermarkets. Sales of its premium Finest food range were also up 10% as shoppers bought ready meals as a cheaper treat rather than visiting a restaurant.

Although underlying sales at Tesco's UK chain, which generates two-thirds of group sales and profits, were negative, the outcome was an improvement on the previous quarter. Philip Clarke, who succeeded Sir Terry Leahy as chief executive in March, said there were "early, encouraging signs of better performance emerging in both the UK and the US", which were both identified as problem markets at his maiden results presentation in April.

At that time Clarke identified a "loss of form" at the UK chain and admitted that some of its problems were self-inflicted, including that non-food ranges were too "samey". It is in the process of revamping them, giving the example that womenswear sales had improved after it introduced more fashionable clothing.

Tesco also flagged like-for-likes up more than 11% at the heavily loss-making US chain Fresh & Easy, with its first stores in northern California starting "strongly". Clarke has set a target for the Los Angeles based chain to get out of the red within two years.

Oriel Securities analyst Jonathan Pritchard said the UK business "has still to click into gear under the new management regime" but that it was early days: "The Tesco super-tanker will take a while to change direction."

Source : Zoe Wood -

14 June 2011
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