Sainsbury's warning as it reports slowest sales growth in five years

Supermarket chain hit by weaker consumer spending and January's snowfalls

Sainsbury's blamed the wider slowdown in the grocery sector for its weakest quarterly sales increase in five years, but said it was ramping up the coupons it offers customers in an attempt to boost trading.

Britian's biggest supermarkets have previously attributed lower sales growth to declining food prices but yesterday the Sainsbury's chief executive, Justin King, cited a recent slowdown in consumer spending. "Most of it is the underlying market performance," he said, adding that January's dire weather and heavy snowfalls also hit sales across the sector.

Mr King said he expected the slower rate of growth at grocers to continue for the next few quarters as household budgets come under further pressure from higher fuel and utility bills and tax rises after the general election.

He added: "The Government has a massive [public-sector deficit] gap to close, so it will have to raise taxes."

His comments came a day after the high-street bellwether Carpetright, the UK's largest floor coverings chain, issued a profits warning and said consumer spending had not recovered since the snow in January.

For the 11 weeks to 20 March, Sainsbury's delivered a 1.7 per cent increase in like-for-like sales, excluding fuel – its slowest quarterly growth since 2005. While the figure was slightly ahead of City expectations, it was sharply down from the annual growth of 3.7 per cent recorded in the third quarter.

Some analysts expressed concerns. Greg Lawless, of Collins Stewart, said: "Sainsbury's is starting to find life tougher in a slowing market and has the weakest operating margin in the sector at 3.3 per cent, with limited upside."

Andrew Kasoulis, at Credit Suisse, said: "Although the fourth-quarter like-for-like slowdown was expected, we think Sainsbury's has been losing market share to some of its bigger rivals over recent weeks."

The market consensus for Sainsbury's pre-tax profits for the year to 20 March is £594m.

Mr King remained bullish about the recent contribution to Sainsbury's sales of its long-standing Nectar loyalty card programme and its "coupon at till" initiative, launched last year. The grocer works with 90 suppliers on the scheme, which provides coupon offers, depending on current promotions and a customer's purchasing behaviour. "We are increasing coupons quarter on quarter," Mr King said.

The company's total sales rose by 7.1 per cent in the fourth quarter, but the figure dropped to a more modest 4.4 per cent when fuel sales were stripped out. The growth was bolstered by one million extra customer transactions in the year to 20 March, raising its weekly total to more than 19 million.

Sainsbury's said its non-food sales grew three times faster than food sales in Q4, but this was worse than in the previous quarter, when non-food sales grew four times as fast as food sales.

The company completed five store extensions and opened six new supermarkets in the fourth quarter, an achievement that Mr King described as "unprecedented". Taking into account 50 new convenience stores, Sainsbury's said it had increased its gross space by 6.8 per cent in the past year and was on track to add 15 per cent in the two years to March 2011, creating 13,000 new jobs.

Of the economic outlook, Mr King said: "I think it is very difficult to predict whether the economy will stay at a level that [means] we are out of recession."

He was more equivocal about speculation that the next Government might levy VAT at between 3 and 5 per cent on food and other groceries that are currently exempt from taxation. Mr King said this would be a "very regressive tax" that would hit families on low incomes the hardest.