Tesco disappoints the City as it trails rivals

Grocer calls on Chancellor to avoid VAT increases

Tesco warned the next government not to raise VAT too high as the retailer reported that its third-quarter UK sales had been "disappointing" despite a massive investment in its Clubcard loyalty scheme this year.

Laurie McIlwee, the finance director at Britain's biggest supermarket group, said he was not concerned about VAT returning to 17.5 per cent on 1 January as scheduled, but warned: "If it went any higher it would have a negative impact." He declined to be drawn on whether Tesco would raise its prices in line with the new rate in the new year or swallow the increase for a time.

His warning on VAT came as the Chancellor Alistair Darling prepared today's pre-Budget report, including plans to tackle the gaping hole in the public finances. Along with an increase in VAT up to 20 per cent, grocers also fear the next administration may introduce a new 5 per cent VAT rate on food, which is currently exempt.

Like-for-like sales, excluding petrol, at Tesco's UK stores rose 2.8 per cent in the 13 weeks to 28 November. Some analysts, however, had expected it to achieve 3 per cent. The growth rate also fell behind the 3.1 per cent recorded in the previous quarter. Like-for-like sales at Tesco's international business were down 3.7 per cent.

But Mr McIlwee insisted: "The UK performance has really delivered for customers. We have seen a convergence of our performance as regards the rest of the pack."

Total sales at Tesco, which operates in 13 countries outside Britain, were up 8.8 per cent, excluding petrol. It cited strong performances in South Korea and China, as well as improvements in Hungary and Slovakia.

Yesterday's UK figures contradict comments made in October by the chief executive Sir Terry Leahy, who claimed Tesco was growing ahead of its three main rivals, Morrisons, Sainsbury and Asda, whose sales rose by 4.3 per cent, 4.6 per cent and 5.6 per cent, respectively, in their third quarters.

Jaime Vazquez, an analyst at JP Morgan, said of Tesco's underlying 2.8 per cent sales increase: "This is disappointing in our view in the context of the doubling of the loyalty card rewards and the heavy advertising expenditure incurred."

Since May, Tesco has pumped hundreds of millions of pounds into its Clubcard scheme. It doubled the reward points returned to customers in August and sent out their 2010 statements, which were due to be posted in February, early and in time for Christmas. Mr McIlwee said many shoppers were saving loyalty points for their pre-Christmas shopping and these purchases would have a "big impact" in the company's fourth-quarter results.

Dave McCarthy, a retail analyst at Evolution Securities, said: "High inflation has been masking some of the underlying poor performances in the industry.

"Now that has come out of the system you can see clearly what is going on and that is 2.8 per cent like-for-like growth at Tesco. It is disappointing."

C hristmas is coming: Waitrose pulls ahead in race to attract seasonal shoppers

Sales at Waitrose are growing at almost twice the pace of its nearest "big four" rivals ahead of the crucial Christmas period. The grocer – part of the John Lewis Partnership – saw its sales for the 12 weeks to 29 November rise by 14.8 per cent, according to the retail analyst TNS Worldpanel. Over the period, Waitrose stretched further ahead of Morrisons' 8.5 per cent increase, Asda's 6 per cent and Sainsbury's 5.8 per cent. Tesco managed only 4.2 per cent, just behind the 4.3 per cent achieved by the supermarket sector as a whole. TNS Worldpanel said it had identified signs that "recessionary buying behaviour" was coming to an end. Its spokesman Edward Garner added: "Premium ranges – particularly Tesco Finest – are in growth, while the hard discount sector, including Aldi, Lidl and Netto, are stagnant, with no year-on-year growth." Waitrose's underlying sales for the 13 weeks to 28 November were up 5.6 per cent, ahead of Tesco's 2.8 per cent.