Tesco, Sainsbury show squeeze on UK shoppers

Pressure on British consumers was laid bare on Wednesday as top retailer Tesco Plc posted one of its biggest-ever falls in underlying sales and rival J Sainsbury Plc reported only modest growth.

The results showed Britons are cutting back on groceries, traditionally the most resilient area of spending, as disposable incomes are squeezed by rising prices, muted wage growth and a government austerity drive.

With household spending accounting for about two-thirds of gross domestic product, that trend could add to fears about Britain's fragile economic recovery and strengthen calls for the government to slow its drive to reduce the deficit.

"UK customers, obviously, are having a very tough time," Tesco Finance Director Laurie McIlwee told reporters, warning second-half UK profits would be broadly flat after the group moved last month to invest 500 million pounds in cutting prices in an attempt to boost demand and stem market share losses.

For the business as a whole, Tesco said it was "broadly comfortable" with analysts' full-year profit forecasts.

Tesco, which takes more than one in every 10 pounds spent in British shops, said sales at stores open for more than a year fell 0.7 percent in its fiscal second quarter, excluding fuel and adjusted for changes in VAT sales tax.

That was the third successive quarterly decline and compared with a drop of 0.4 percent in the previous quarter.

Tesco, which makes about two-thirds of sales in Britain, has been suffering more than rivals in its home market because it sells a larger proportion of discretionary goods, where shoppers have been cutting back most.

Sainsbury's, British No.3 behind Tesco and Wal-Mart Stores Inc's Asda, said its second-quarter sales rose around 1.1 percent on a broadly comparable basis, helped by store extensions and its expansion into convenience stores, online shopping and non-food ranges.

With food prices rising around 5 percent, however, that suggests shoppers are cutting back on the number of groceries they buy.

Tesco boss Phil Clarke said higher petrol prices had taken a particularly heavy toll on British shoppers, with customers spending an extra 750 million pounds on filling up their cars in the first half compared with the same time last year.

At a group level, Tesco's weak performance in Britain was offset by its expansion in faster-growing Asian markets and reduced losses at its U.S. chain Fresh & Easy.

The world's No.3 retailer said its operating profit rose 3.7 percent to 1.77 billion pounds in the 26 weeks to August 27 on a 7.8 percent rise in sales to 31.8 billion, excluding VAT.

Analysts had forecast an operating profit of about 1.83 billion pounds and sales of 31.9 billion.

The figures compare favourably with bigger international rivals Carrefour SA and Wal-Mart, which also face weak demand in their home markets.

Tesco, with around 5,400 stores in 14 countries, said profit rose 19 percent in Asia, 4.5 percent in Britain and 12 percent in other European markets, while U.S. losses narrowed to 73 million pounds from 95 million the year before.

Clarke, who succeeded long-serving predecessor Terry Leahy in March, has pledged to slash U.S. losses this year and drive the business into profit by the end of fiscal 2013, as part of a goal to lift investment returns.

Source : Mark Potter & James Davey – Reuters
http://uk.reuters.com/article/2011/10/05/uk-retail-britain-idUKTRE7940ZS20111005