Now even Tesco starts to feel the pinch of a consumer slowdown

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The Independent Online

Tesco yesterday gave the clearest sign yet that the consumer downturn is beginning to dent its UK business, warning of a slowdown in non-food sales growth.

The UK's largest grocer posted like-for-like sales in Britain up 3.5 per cent, excluding fuel, for the 13 weeks to 24 May. But the last reported like-for-like sales of rivals Asda and Morrisons were comfortably ahead of Tesco's – albeit for different trading periods, while Sainsbury's last figures were marginally ahead.

James Anstead, a Citi analyst, said: "The like-for-like figure, although weaker than some may have hoped, is well within the targeted 3 per cent to 4 per cent for the financial year."

Tesco's chief executive, Sir Terry Leahy, said: "It was a good quarter of growth across the business." However, he admitted that its rate of sales growth in non-food eased as consumers became more cautious with their spending, although Tesco stressed it grew market share. More specifically, Mr Leahy said: "Clothing has been most affected by the combination of the slowdown and poor, mixed weather."

The Seymour Pierce analyst Freddie George said: "They will be a little bit disappointed by their non-food sales because these normally boost their overall growth figures."

Group non-food sales accounted for £11.8bn of the grocer's total sales of £51.8bn in the year to 23 February.

Mr Leahy said the big theme in the wider UK grocery market was that customers are "looking to spend a little bit less", although he said this climate favours retailers such as Tesco, Asda and Morrisons, as well as the discounters.

Mr Leahy said: "In our industry, I am not expecting a further deterioration on the consumer side."

He said that food inflation had risen by between 3 per cent and 4 per cent for the first quarter and that there was deflation in non-food, which gave the grocer an overall inflation figure of 2.1 per cent in the UK.

In the UK, Tesco is to fight back by ramping up its promotional pricing activity in stores. "We are rolling out a more aggressive look in stores so it is all about communicating to customers that we know what is on their mind," said Mr Leahy.

For the 13 weeks to 24 May, Tesco's total UK sales jumped by 9.4 per cent. The retailer's international sales continue to power ahead. Its overseas sales jumped by 13.9 per cent over the 13-week period, partly driven by a strong performance in Europe. On its United States convenience store business, Sir Terry rejected criticism, saying: "Fresh & Easy sales are ahead of expectations and our plans there are on track."

Tesco plans to add more than 9.8 million square feet of selling space overseas this year, which excludes the space it plans to add through its recent Homever acquisition in South Korea. The Shore Capital analyst Clive Black said: "There is no indication of international like-for-like sales, although we would suggest a running rate of about 2 per cent [growth]." He added that this headline international sales growth is ahead of its expectations.