Tesco's sales have slumped into negative territory in Britain for the first time in 20 years, as its chief executive said customers were "struggling to make ends meet".
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7:37PM BST 05 Oct 2011
3 CommentsPhil Clarke, who took over from Sir Terry Leahy six months ago, admitted that the company had "not been on the front foot" as he published a good set of results that were knocked by a poor performance in Britain and its stuttering move into banking.
Higher prices, especially the substantially higher cost of petrol and utility bills, have meant that many British shoppers were reluctant to drive to large out-of-town superstores.
The company said that its petrol sales had increased by £750m in the first half, compared with the same period a year ago, but nearly all of the increase was down to inflation, driven by higher prices and higher duty. "That's extraordinary," said Mr Clarke, "that's £750m that could be spent in shops or paying off credit cards."
Consumers have also noticeably cut back on non-essential household items. The company's non-food sales – an increasingly important part of its business in recent years as it has eaten into the market share of the likes of Argos and Dixons Retail – fell by 4.8pc during the first half.
Mr Clarke said consumer confidence had deteriorated in recent weeks: "I can remember bringing up a family in the late 1980s and early 1990s and it was pretty tough then when interest rates rocketed. It was bad. It feels like that. But it's different because of the global economic system – every time you open a newspaper, look at a news website, watch the television, consumers are being continually reminded that things could be more difficult next week; confidence is being harmed."
British sales excluding new store space, VAT and petrol were down 0.9pc in the three months to August 27, with sales volumes falling by an even greater amount.
This is the worst performance for 20 years. During the 1992 recession, sales volumes fell by 1pc during its first half.
Despite the sales fall, UK profits increased by 4.5pc and group profits moved up by 12.1pc to £1.88bn on total sales of £35.5bn, an increase of 8.8pc. The company has been boosted by cutting its losses in America and increased market share in Thailand and the Czech Republic.
The real disappointment came from its banking operation, which the company took full control of from RBS, its joint-venture partner. The switch to Tesco's own platforms caused serious teething problems, with customers locked out of their online accounts.
Tesco was also forced to increase its provisions for missold payment protection insurance (PPI) – a scandal that hit nearly all banks – sending trading profits at the division down 66pc to £44m.
Most analysts were happy that the solid growth in Tesco's international business more than offset its difficulties in the UK.
Jonathan Pritchard at Oriel Securities said: "The PPI and IT-based problems at the bank are irritants rather than fundamental problems and thus we do have to downgrade headline PBT numbers today, but we feel as though momentum in the food retailing side of Tesco is on the turn."
Mr Clarke said the "Big Price Drop" campaign, which started last week in its British stores would make a genuine difference to struggling customers, contrary to rivals' claims that it is a marketing gimmick. He said lower prices on food such as milk and mince would keep inflation to just a quarter of the official rate, which last month ran at 6.2pc. "There's no smoke and there aren't any mirrors," he said, adding that the initiative put Tesco "back on the front foot".
The interim dividend of 4.63p, up 5.9pc, will be paid on December 23. Tesco shares climbed 13.15 to 393.25p.
