Philip Clarke, the chief executive of Tesco, has blamed a further deterioration in consumer confidence and the "extraordinary" impact of higher petrol prices on expenditure for a dire set of UK sales, although group profits surged in the first half.
Mr Clarke also hit back against criticism of the £500m-plus investment it made last month in lowering prices, saying "it is not smoke and there are no mirrors". Instead, Mr Clarke said the "real reduction in prices" would contribute to Tesco posting "broadly flat" underlying UK profits in the second half of the year.
Strong growth overseas, notably in Thailand and China – as well as a rapid store opening programme in the UK – helped the group increase its pre-tax profits by 6.2 per cent to £1.92bn for the 26 weeks to 27 August. The supermarket giant, which has operations in 14 countries, posted total sales up by 8.8 per cent to £35.53bn.
However, in the UK – which accounts for more than 70 per cent of group trading profit – Tesco's underlying sales, excluding fuel and petrol, fell by 0.5 per cent over the half. Its UK like-for-like sales tumbled by 0.9 per cent in the final three months – Tesco's weakest performance for about two decades.
In particular, the grocer's non-food operation, which fell by 4.8 per cent in the first half, is being hit by the squeeze on discretionary spending, as well as by higher petrol prices that have led to fewer trips to its out-of-town hypermarkets.
Mr Clarke said that, even so, Tesco's UK customers had spent an "extraordinary" £750m more on petrol over the half because of the higher prices, and this had hit disposable incomes hard.
Tesco's chief executive was also downbeat on consumer sentiment. Mr Clarke said: "Confidence is lower than it was at the beginning [of the half]... there is not much good news out there."
To turn around its UK performance, Tesco launched a £500m offensive last month to reduce prices on more than 3,000 items in its stores. It is also investing in customer service and product across its stores.
Jonathan Pritchard, a retail analyst at Oriel Securities, said: "The Big Price Drop gets all the headlines and analytical attention but we're more impressed by the activity regarding quality in fresh, availability and the improvements in staff densities." Tesco has continued to expand rapidly in the UK, adding more than 700,000 square feet of space in the first half. The grocer increased its total UK sales, including petrol, by 7.1 per cent to £23.43bn. New stores and extensions accounted for more than half of this increment.
Mr Clarke struck a bullish note on Tesco's Fresh & Easy convenience store business in the US, which it has vowed to make profitable by 2012-13. He said the reduction in Fresh & Easy's losses – down 23.2 per cent to £73m – was "an important milestone", achieved through continuing sales growth and better margins from its acquisition of a supplier in the US.
Mr Clarke said: "I am even more confident that we are on track to break even than I was in April."
However, Tesco Bank suffered a 65.9 per cent fall in profits to £44m,largely because it increased its provision by a further £57m for alleged mis-selling of payment protection insurance relating to its joint venture with Royal Bank of Scotland before 2008. The bank has also suffered IT setbacks.