Tesco, the world's No 3 retailer, has posted a drop in quarterly underlying sales in its main British market, resuming a trend seen for most of the past three years and raising doubts about its 1 billion-pound ($1.5 billion) turnaround plan. Shares in the supermarket group fell up to 4.9 percent on June 05 after it said it had suffered from weak demand for general merchandise, as cash-strapped Britons cut back on discretionary purchases in a flagging economy, as well as the fall-out from Europe's horsemeat food contamination scandal.
Some analysts, such as Investec Securities' Dave McCarthy, have questioned whether Tesco can maintain its UK operating profit margin of 5.2 percent, even though the company said in April it believed that rate was sustainable. Tesco, which makes about two thirds of its revenues in Britain, has struggled more than many rivals in part because it sells a higher proportion of non-food goods than other grocers and also because of years of underinvestment that saw it lose ground to rivals like J Sainsbury and Asda.
Philip Clarke, chief executive since 2011, has tried to rectify that by investing 1 billion pounds on more staff, new food ranges, revamped stores and lower prices. However, sales at Tesco's UK stores open over a year, excluding fuel and VAT sales tax, fell 1 percent in the 13 weeks to May 25, at the bottom end of analysts forecasts for a fall of between 0.5 and 1 percent and reversing a rise of 0.5 percent in the previous quarter, which was the strongest quarterly result in three years.
"These results go to show that even with 1 billion pounds to throw at it, there are no guarantees," said John Ibbotson, director of retail consultants Retail Vision. Despite the fall in underlying UK sales, Clarke told reporters his recovery plan was on track. "What we're into is long term sustainable growth. It's going to ebb and flow over a quarter but the direction of travel is the right direction," said Clarke, a Tesco lifer who began his career with the grocer aged 14, stacking shelves in a store managed by his father.
Clarke said he was not expecting UK economic conditions to improve in the near term, despite an industry survey on June 04 showing retail sales rebounded in May. He forecast non-food like-for-like sales would remain down in the current financial year, but stressed it was a "top line" (sales) rather than a "bottom line" (profit) drag. Tesco was reducing its exposure to weaker categories like consumer electronics, and increasing its focus on higher growth, higher margin categories like clothing, he said.
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