Tesco takes the fight to discount retailers
2 Dec 08
A new range of cheaper products has helped Tesco attract more shoppers to its supermarkets and compete more effectively with discount retailers as British consumers increasingly seek to save money on their weekly shopping bills
The supermarket group on Tuesday said it had attracted an extra 300,000 shoppers every week and a quarter of its customers were buying its new “Discounter” brands, which it launched in September and included products such as Trattoria Verdi for pasta and Packers for tea.
The 350-product range uses exclusive brands that are priced well below the branded equivalent, although above its own “value” ranges.
The group said inflation had “reduced substantially” in the quarter, and even more rapidly in Tesco shops following the introduction of its discount ranges but at the expense of the value of its sales growth.
Reporting a rise in UK like-for-like sales of 2 per cent in the third quarter of its financial year, the 13 weeks to November 22, Tesco said “we have deflated our sales during the quarter by between two and three percentage points” by introducing the ranges.
Sir Terry Leahy, chief executive, said while the group had made solid progress – showing an 11.7 per cent sales increase in total when its international operations are included – it was nevertheless “realistic” about the current economic climate.
Analysts at Nomura said the latest figures from Tesco were ahead of consensus forecasts and showed that the group was competing effectively with threat from discount retailers like Aldi and Lidl. The shares opened 4 per cent higher at 299½p.
The 2 per cent increase in the UK compares with a 3.9 per cent rise reported by J Sainsbury for its latest trading period, 28 weeks to October 4, and a 6.9 per cent like-for-like gain from Asda, part of Wal-Mart, in the quarter to the end of September.
The figure represents a slowdown from 3.7 per cent achieved in the first half of its financial year. Even so, the increase beat some analysts’ expectations that the underlying sales rise would be barely more than 1 per cent.
“This stock was priced for a profit warning and as we thought it has not materialised; what has, is a robust, positive and clear message that the business is structurally and strategically well positioned for the consumer downturn,” said Nomura, which has a “buy” rating on Tesco shares.
Although the group was generating cash and had no sizeable short-term debt repayments to make, it said it was cutting its planned capital spending to below £4 billion for next year.
Group capital expenditure had been £2.5 billion in the first half, but that was due to slow in the second half while Tesco has to pay for an acquisition in South Korea and the move to buy-out Royal Bank of Scotland’s half share in their personal finance joint venture.
In the US, the group had already held back on expansion of its newly-established Fresh & Easy chain. It said performance from the stores there continued to be “pleasing” with the earliest of them now showing like-for-like growth.
International sales were boosted by currency translation, and were slowing in several regions at constant exchange rates, Tesco said. International sales rose 28.1 per cent, but by 14.6 per cent at constant rates. Asia was particularly strong, but Europe had slowed to show a rise of 6 per cent.
In the UK, total sales rose 5.9 per cent including fuel sales and the benefit of store openings.
Non-food sales had shown a “small decline” on a like-for-like basis, but Tesco said had performed “significantly” better than the market as a whole.