Tesco will this week report a sluggish sales performance in its key UK market as rivals continue to slash prices ahead of the key Christmas period. A third quarter update from the country's largest retailer will make for gloomy reading on Tuesday as Tesco continues to suffer from a flat UK market and increased competition from the likes of Sainsbury's and Waitrose.
Tesco is facing unprecedented promotional activity by rivals such as Sainsbury's and Morrisons. Both have grown sales at a faster pace than Tesco in recent months, though Asda is also struggling.
Added to this, high-end grocer Waitrose has continued to make inroads into the market, with celebrity chefs Heston Blumenthal and Delia Smith continuing to attract well-heeled shoppers away from its larger rivals. Waitrose posted a sales rise of 11% last week, despite the disruption caused by the harsh weather.
Tesco, meanwhile, is unlikely to improve upon its first-half growth rate just 0.3%. A flat third-quarter performance in the UK will be to some extent offset by a robust performance in Tesco's international stores, with China and Korea in particular expected to continue the stellar growth rates of recent quarters. While the Asia performance will drive group sales higher, it is the performance in its home market which will hit the headlines – and the company's share price.
"We think that the biggest lever for the share price will be the UK," said Altium analyst Philip Dorgan. He is confident that in the long term Tesco can leverage its scale in the UK and return to growth.
The UK still accounts for around two-thirds of sales, though much of the company's growth in recent years has been generated elsewhere. Tesco's chief executive Terry Leahy steps down in March after 14 years at the helm. The immediate task facing his replacement Philip Clarke will be to revitalise the UK operations.
Tesco's sales over the next three weeks will be vital to its annual performance. The recent snowfall will not help Christmas sales, though its strong online presence and its chain of easily accessible convenience stores will insulate it from the worst effects of the cold weather. Department store operator John Lewis expects to see a surge in big-ticket spending ahead of the VAT hike and has already reported strong sales of televisions, furniture, upholstery, rugs and beds in recent weeks.
The Christmas period is particularly important for the sector this year, given what is to come in January. B&Q owner Kingfisher warned this week that the VAT hike, combined with the government's austerity measures, would knock between 2% and 3% off DIY sales next year. In an effort to boost sales, promotions on the High Street have stepped up in recent days.
While none of the major retailers have yet gone "on sale", many have already started selective discounting. Home Retail's Homebase has slashed the price of artificial Christmas trees and lights in half, while its Argos chain is attracting shoppers with its largest ever half-price toy sale. Debenhams, meanwhile, is offering discounts of up to 20% in its stores, while discounter Matalan is running a buy-one-get-one-free on all gifts.
Figures from the first three-quarters of the year show the economy growing, though it is being pushed along by sectors like construction and finance in a way that many commentators argue will prove to be temporary.
The British Chambers of Commerce's chief economist, David Kern, said: "UK GDP growth was very strong in the second and third quarters of 2010, and the pace of expansion should remain satisfactory with growth of 0.6% in Q4 2010. This will be sustained by the competitive sterling exchange rate, the continued effects of the earlier policy stimulus, and consumers attempting to beat the VAT increase."
Britain's economy can expect a rocky time over the next year but will improve strongly over the longer term if the government sticks to its austerity plan, the BCC said.
The BCC said, adding that its downward revision to the 2011 growth forecast also reflected lower house prices and "other signs of financial fragility in the UK household sector". The worsening Eurozone debt crisis will dampen UK growth prospects next year more than formerly expected, it said.
"However, some of the factors driving growth in 2010 are temporary," Kern said. "The fiscal austerity programme entails risks, particularly in the next few quarters. We expect a sharp slowdown in the pace of UK growth starting in Q1 2011, in reaction to the VAT rise to 20% and as tough deficit-cutting measures are implemented.
"Consequently, year-on-year GDP growth, after rising to 3.0% in Q4 2010, is forecast to fall sharply to 1.4% in Q3 and Q4 2011, and stay below 2% in the early months of 2012."
