Tesco's UK sales slide as consumers cut non-essential spending

Non-food spending slumps
• High petrol prices squeeze household budgets
• But Tesco food business sees sales growth
• ... and profits up 6% to £1.9bn
• Sainsbury's Q2 sales up
• Convenience stores see pick-up

Tesco has reported its weakest six-monthly UK sales figures for 20 years as higher food and fuel costs contributed to stark decline in spending on non-essentials such as gadgets, CDs and games in its stores.

UK like-for-likes, excluding petrol and VAT, declined 0.5% in the six months to 27 August, with underlying sales down 0.9% in the final three months of the period. Tesco chief executive Philip Clarke conceded the like-for-like performance was "slower than planned" but added that it had faced the most "challenging retail market we have seen for a generation". Tesco said high petrol prices were a major problem for consumers spending £750m more at the forecourts during the period. He said customers were "finding it difficult to cope on very tight budgets".

Tesco said that although its food business saw underlying sales growth, sales had continued to fall in its large non-food departments, particularly in important areas such as electronics and entertainment. Tesco has the largest non-food business of any supermarket and it accounted for £5.3bn of its £44.6bn UK sales last year. The tough environment did not prevent a 4.5% increase in UK trading profits to £1.3bn. Aided by a strong performance in foreign markets, the group delivered a 6% rise in profits to £1.9bn on sales up nearly 9% to £35.5bn.

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. Tesco is the UK's biggest grocer with a market share of more than 30% but its performance has lagged that of smaller listed rivals Sainsbury's and Morrisons for the last two years and Clarke said it was time for "substantial changes" to sharpen "execution and competitiveness" for customers.

Last week Tesco launched a £500m price cuts campaign – the "big price drop" – in a bid to woo back shoppers and arrest recent declines in its market share, although it has been accused of not being bold enough. Tesco promised that there will be "more change to come", but warned sales would not pick up immediately.

Sainsbury's said on Wednesday that its second-quarter sales had risen around 1.1% on a broadly comparable basis. Its chief executive Justin King described the performance as good despite a "tough consumer environment". Total sales were up 7.8%, boosted by its 400 Sainsbury's Local convenience stores, which saw growth of 20%, the company said.Supermarkets are seeing a pick up in sales at their convenience stores as consumers shop more frequently for the things they need rather than risk overspending on a big shop.

US venture

Panmure analyst Philip Dorgan said Tesco's price cuts campaign would help it to regain momentum in food and flagged the improving performance of loss-making US start-up Fresh & Easy. The California-based chain saw losses reduce by 23% to £73m with Tesco stating it was on track to break even in the next financial year.

Tesco also said it was putting the brakes on the expansion of Tesco Bank until next year as it makes sure its systems work correctly before launching mortgages and current accounts. It was expected to start offering mortgages this autumn, but has slowed the launch after customers were locked out of online savings accounts in the summer when it migrated them to new systems.

Clarke said: "We had a bit of a problem in the summer in migrating from the Royal Bank of Scotland's systems to our own. Our savings products weren't available for a few hours; not good. We're slowing down in order to make sure that the next and last migration, which is credit cards, goes without a hitch."

The retailer bought RBS's 50% stake in Tesco Personal Finance for £950m in 2008 and has been building a new IT platform and seeking the regulatory approval required to enable it to compete with high-street lenders. The retailer also said it had increased its provision for any potential payment protection insurance claims by £57m to £92m.

Shore Capital analyst Darren Shirley said: "We cannot hide our disappointment with the bank outcome at this stage but Tesco is, to our minds, correct to get its proposition right first time; the PPI position is a little more perplexing. However, we believe that Tesco is moving in the right direction in the UK."