Tesco prepared to press the price button

Tesco posted underlying festive sales yesterday that are likely to be behind all its big three rivals , but strongly hinted it is preparing to further step on the accelerator in the price war raging in the grocery sector.

Andrew Higginson, Tesco's chief executive of retailing services, said: "We have taken out £200m since the beginning of January. We have been particularly active so far and there is much of the same [to come] this year."

Last week, Tesco said it had invested £100m in price cuts, taking its investment over the past fortnight to £200m. Jonathan Pritchard, the Oriel Securities analyst, said: "What worries me about the industry is that Tesco may press the price button this year and that could have a serious impact on everybody [in the food sector]." He warned that if Tesco did ratchet up the pressure on price, then "all forecasts in the sector are under threat".

For the seven weeks to 10 January, Tesco delivered UK like-for-like sales growth of 2.5 per cent, excluding fuel, which is likely to be substantially behind the figures of Sainsbury's, Morrisons and Asda. However, Tesco's UK sales growth was slightly ahead of the 2 per cent it posted in the third quarter.

For the 13 weeks to 3 January, Sainsbury's posted underlying sales, excluding fuel, up by 4.5 per cent. Morrisons is set to unveil strong sales when it updates the market on Christmas trading on 22 January, while Asda's update in mid-February is expected to reveal like-for-likes up by about 7 per cent, or higher, for its fourth quarter.

Mr Higginson pointed to TNS Worldpanel data yesterday that showed Tesco's growth was marginally ahead of Sainsbury's, but behind Asda and Morrisons for the four weeks to 28 December. However, over the more widely recognised 12-week period to 30 December, Tesco's 4 per cent growth lagged behind Sainsbury's 5.1 per cent, Asda's 7.2 per cent and Morrisons' 9.7 per cent. Mr Higginson said: "We outperformed Asda for years until 12 months ago and Morrisons has had a good year." But he added that Morrisons is now only back to around where it was before the Safeway acquisition in 2004.

City analysts said Tesco's underlying sales had been dented by the launch of its lower-priced discounter branded products in September. Mr Higginson said: "They [discounter brands] have been fairly well received by customers. It is a long game and you have to wait to see how it pans out."

However, Mr Pritchard said: "You cannot make a judgement over three to four months. That said, I prefer the thinking behind Switch and Save at Sainsbury's, which is moving from branded products into higher-margin own-label products. But at Tesco they are encouraging people to buy lower cash margin [discounter] products."

Over the seven weeks, Tesco saw "double-digit" increases in sales of its standard value lines, but underlying sales of its Tesco Finest range are thought to have fallen by between 7-8 per cent.

At a group level, Tesco's sales soared by 11.6 per cent for the same period. Its total international sales surged by 32.7 per cent, helped by favourable exchange rate movements in Europe.