LONDON (Reuters) - Tesco (TSCO.L), the world’s third-biggest retailer, fell back to an underlying sales decline in its main British market in its third quarter, raising new questions over its recovery strategy.
“Continuing pressures on UK household finances have made the grocery market more challenging for everyone since the summer and our third quarter performance reflects this,” Chief Executive Philip Clarke said.
“Overseas, the near-term trading environment also remains tough.”
Tesco, which makes about two thirds of its revenue in Britain, is 20 months into a turnaround plan for its main UK business that has pumped over 1 billion pounds ($1.64 billion) into store revamps, more staff, new product ranges and pricing initiatives.
Despite this, sales at British stores open over a year, excluding fuel and VAT sales tax, fell 1.5 percent in the 13 weeks to November 23.
That compares to analysts’ forecasts of down 1-2 percent and flat like-for-like sales reported for the second quarter.
Meanwhile overseas markets that once provided a hedge against weak demand at home now appear to be more of a hindrance. Like-for-like sales fell by 5.1 percent in Asia and were 4.0 percent lower in the Europe division.
Total group sales increased 0.6 percent at actual exchange rates, excluding petrol.
“Despite the challenging conditions in many of our markets, we are performing in line with market expectations for the full year,” Tesco said.
Analysts’ average forecast for group trading profit in 2013-14 is 3.39 billion pounds, down from the 3.45 billion pounds made in 2012-13, according to Tesco’s website.
Tesco, in common with Britain’s three other major grocers - Wal-Mart’s Asda, J Sainsbury (SBRY.L) and Wm Morrison (MRW.L) - is being squeezed by hard discounters Aldi ALDIEI.UL and Lidl LIDUK.UL and upmarket grocers Waitrose JLP.UL and Marks & Spencer (MKS.L).
Last month Kantar Worldpanel, the market research group, reported that all of the “big four” were losing market share for the first time in over a decade, while Aldi’s share was at a record high.
Last month Asda reported a 0.3 percent rise in third quarter like-for-like sales and said it would invest 1 billion pounds on price cuts over the next five years.
The step up in competition has prompted some analysts to suggest Tesco needs to cut prices to reclaim lost market share, putting a doubt over the sustainability of its targeted UK operating margin of 5.2 percent.
The group did not give an operating margin for the third quarter. ($1 = 0.6092 British pounds)
Reporting by James Davey; editing by Kate Holton