Food and petrol prices behind slowdown in Tesco's sales growth in the UK

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Tesco blamed low food price inflation for its weakest UK underlying sales for more than five years, as it urged the Government not to raise VAT in next week's emergency Budget, nor to levy it on food in the future.

The grocery giant said its UK underlying sales, excluding fuel and adjusted for VAT, grew by just 0.1 per cent in the 13 weeks to 30 May – the smallest rise since it starting separating out fuel figures in 2004-5.

But Laurie McIlwee, the finance director, said that in addition to lower food price inflation, which has affected sales at all of the major supermarkets, shoppers were "having to spend 30 per cent more per litre on their fuel".

According to analysts at Kantar Worldpanel, UK food inflation slumped to 1.4 per cent in the three months to 16 May, compared with 9 per cent early in 2009. Andrew Kasoulis, an analyst at Credit Suisse, said there was "some food inflation creeping back into the mix" for the grocery sector.

Tesco expects its UK underlying sales to come in at about 3 per cent this financial year. McIlwee said Tesco continued to see good growth in sales of its premium range and that underlying non-food sales remained positive.

However, the anaemic underlying sales growth in the UK – which accounts for 70 per cent of Tesco's group trading profits – highlights one of the challenges for Philip Clarke, who will take over as chief executive in March 2011. Mr Clarke, head of the grocer's international business, was appointed last week after the current chief executive, Sir Terry Leahy, said he would retire next March.

Tesco's total UK sales, including VAT, petrol and new shop space, were up by 6.5 per cent. In a first-quarter update today, Sainsbury's underlying sales are forecast to rise by 0.5 to 1 per cent.

Tesco, which operates in 14 countries including the UK, said its group sales rose by 8.2 per cent, boosted by strong performances in China, Poland, South Korea and Ireland. "That would be a stunning performance for many companies," Mr McIlwee added. Total international sales grew by 5.3 per cent at constant currency rates.

Tesco said sales of World Cup merchandise had soared in countries which have qualified for the competition. In the UK, it has already sold 800,000 England flags, 30 per cent more than in the last World Cup tournament. Sales of large-screen televisions have also been strong, with premium brands up by 100 per cent. In South Korea, Tesco has sold 700,000 football shirts.

Mr McIlwee urged the Chancellor, George Osborne, not to raise VAT in next week's Budget, saying: "There is a fragile recovery going on and you would not want to stifle it."

He also said the imposition of VAT on currently exempt products such as food, books and children's clothing would "disproportionately" hit those on lower incomes.