4th Jun 2014 08:12
LONDON (Alliance News) - Tesco PLC reported Wednesday a sharp drop in sales in the first quarter of its new financial year, as Britain's biggest supermarket chain said it was hit hard by deep price cuts across the business and by the acceleration of its store refit programme, while warning of more UK sales declines in coming quarters.
Tesco posted a 3.3% like-for-like decline in sales including petrol for the quarter ended May 24, and a 3.2% fall excluding petrol. It was hardest hit in the UK, where like-for-like sales in the business were down 3.8% including petrol, and 3.7% excluding petrol.
The group highlighted weak sales figures from the UK and Europe, deep price cuts, and an increasingly competitive UK market as the reason behind its poor performance. However Tesco Chief Executive Philip Clarke also warned that its turnaround plans for the business will continue to weigh on the business's "short term" like-for-like sales, and said the declining UK sales will continue in the coming quarters.
"The drop in UK sales is exactly what we expected as we increased our store refresh programme and because of deep discounting," Clarke told journalists in a call Wednesday. "We haven't seen a quarterly like-for-like performance like this before, but we have also not seen competition like this before in the industry."
Clarke said there are even more price cuts to come.
"Price is an important part of the picture, but its not the whole story... but with reduced prices, that has meant we are driving deflation in the business," said Clarke.
Clarke has been under the spotlight of late, as he has yet to smooth investor concerns about the ongoing pricing war or reassure them about he intends to return the supermarket to growth in its home market.
Tesco continues to struggle to keep up with better-performing rivals and maintain market share back in the UK, having reported another drop in annual group trading profit for its last financial year, as it saw falling sales in the UK and Europe. Discount supermarkets Aldi and Lidl are upping the pressure on the UK's big supermarkets, and not just on Tesco but J Sainsbury PLC and Wm Morrison Supermarkets PLC as well.
"Tesco's first quarter trading update was widely expected to be poor, the worst update from the company in a generation, and so it has turned out to be, following on from recent worrying market share data, which revealed another sharp contraction year-on-year," said Shore Capital Analyst Clive Black in a research note, referring to market share data released by Kantar Worldpanel on Tuesday.
Tesco said its made "four waves of price reductions" in the first quarter, including lowering its home delivery charges, launching its Clubcard Fuel Save, and reducing untargeted promotions to cut prices permanently on key products.
The group also said that it has stepped-up the pace of its store refit programme. It said that it refreshed just over 100 stores in the quarter, will refresh over 200 more by the end of the first half, and 650 by the end of the year.
"Our store refresh programme is on track to bring a new face of Tesco to 650 neighbourhoods this year including over 100 of our Extra stores. As expected, the acceleration of our plans is impacting our near-term sales performance," Tesco said.
Tesco faces a number of challenges in improving its trading performance both at home and abroad.
It said Wednesday that trading conditions in the UK will continue to remain weak. In the first quarter, the group reported a 2% fall in UK sales including petrol in both actual rates and constant currency, compared with 0.1% growth in including petrol, and 1.0% growth excluding petrol fir the same period last year.
In Europe, Tesco said it is seeing some early signs of improvements in the region, with positive like-for-like sales in the Czech Republic, Hungary, Poland and Turkey. However in the first quarter sales in the region overall worsened significantly, down 7.1% including petrol, compared with only a 0.3% decline the prior year. On a like-for-like basis, however, sales significantly improved.
"Ireland remains intensely competitive with high levels of untargeted couponing in the market, but our performance there is starting to improve," Tesco said.
Tesco recorded some better news from Asia, having recently completed the creation of a new venture in China with China Resources Enterprise, in which it is a minority shareholder. In Asia, sales in the first quarter fell by 8.9% including and excluding petrol at actual exchange rates, slowing from a 10.9% decline a year earlier. Like-for-like sales fell by 3.2% both including and excluding petrol, compared with a 3.8% decline a year earlier.
"We are now able to reach profitability in China much more quickly, and capital investment there will be dramatically reduced," Clarke told journalists Wednesday.
Back in the Tesco and Morrisons continue to compete on price, having already launched huge investments in price cuts this year. Sainsbury's has said that it will not be dragged into an outright price war, but will remain competitive using its brand match programme, which gives customers vouchers to cover any difference in prices of branded goods they paid for at Sainsbury's that were cheaper at Tesco.
"The competitive environment has forced players to push harder on prices, and we have tried to respond," Tesco's Clarke said on Wednesday.
According to the latest grocery market share figures from Kantar Worldpanel on Tuesday, Tesco, Sainsbury's and Morrisons all reported market share declines in the 12 weeks ending May 25, while Wal-Mart Stores-owned Asda was the only large grocer to grow its share year-on-year during the period.
Tesco's till rolls declined 3.1%, while its market share dropped to 29.0%, from 30.5%, Kantar said. Sainsbury's till rolls rose 0.9%, but market share still declined to 16.5%, from 16.7%, it said.
"If Tesco and Morrisons continue to compete on price, unless people react by flocking to their stores and buying more stuff, decreasing price immediately deflates their business and produces a drop in turnover and market share," said Edward Garner, a director at Kantar Worldpanel, told Alliance News on Tuesday.
Tesco has attempted to lure customers back into its stores by slashing its online shopping delivery charges, introducing a free click-and-collect service for groceries across the UK, a service for which it previously charged, and cutting prices on over 30 major products, such as bacon and baked beans.
It has also launched a loyalty Clubcard, to reward customers for shopping there, including the recent launch of its 'Clubcard Fuel Save,' which gives its customers money off when they fill up with fuel at Tesco petrol stations.
Earlier this week, Tesco announced that it had partnered with House of Fraser to sell over 2,000 homeware products though Tesco Direct, including popular House of Fraser brands such as Linea and Pied A Terre.
The deal will extend the supermarket's reach into more "premium" products, while House of Fraser will benefit from Tesco's large customer base.
Last week, Tesco said it failed to strike a deal with various parties regarding "potential options" for its struggling Turkish business, Tesco Kipa, which had included a possible sale of the business or a potential tie-up.
"We were in discussions about a partnership, but in the end we couldn't reach an agreement," Clarke said on Wednesday.
Tesco shares were off slightly at 297.45 pence Wednesday morning, having touched 305.00 pence at the open.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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