Tesco sees 'challenging' trading

Supermarket giant Tesco has reported sales growth in line with expectations for the key Christmas period, but said trading conditions were "challenging".

Like-for-like UK sales, excluding petrol, rose 2.5% in the seven weeks to 10 January. Adjusting for the lower value added tax rate, sales rose 3.5%.

Total group sales rose by 11.6% during the period, helped by overseas growth.

The economic slowdown is forcing consumers to cut their spending, notably on non-essential goods.

Balance sheet

A survey of the UK economy, released on Tuesday by the British Chambers of Commerce (BCC) suggested there had been a "frightening deterioration" in the UK economy towards the end of 2008.

While Tesco's UK like-for-like sales growth was the slowest since the early 1990s, Sainsbury's reported last week that it had enjoyed its "best ever Christmas", with sales up 4.5%.

"As a business, it's so big that it can cut prices to win customers, and then share the pain of those lower prices with suppliers"
Robert Peston, BBC business editor

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "Tesco, once the darling of the sector in analysts' eyes, has somewhat fallen out of favour of late and this update is unlikely to reverse the trend."

The figure "will possibly be dwarfed by Morrison's number next week. The aggressive nature of cost cutting by its competitors is clearly giving Tesco food for thought at the current time," he added.

But BBC business editor Robert Peston points out that Tesco, as well as selling food, an essential item, has two "enormous advantages" over other firms.

"It has a massive and fantastically strong balance sheet - so it is not constrained by the shortage of credit that's mullering smaller businesses," he said.

"And as a business, it's so big that it can cut prices to win customers, and then share the pain of those lower prices with suppliers."

Overseas growth

Tesco, which operates in 13 countries, said its performance had been "against the background of challenging trading conditions in all of our markets caused by the global economic slowdown".

The latest figures come after the supermarket saw UK sales growth of 2% in the 13 weeks to 22 November.

While UK trading conditions remain difficult, the firm has benefited from international sales, which were up by 32.7%.

Sales in Asia were especially strong, up 43%, while European sales grew 24%.

The supermarket described online sales as "very strong" in the run-up to Christmas, with tesco.com and Tesco Direct seeing total combined sales up 18% at £273m.

Shares in the firm ended Tuesday up 0.4%, 1.3 pence to 351.60p.

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