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Business News

Tesco profits drop by quarter as Sainsbury's prospers from cash-strapped customers

Tough overseas markets blamed for slump but UK trading profits on the rise

Tesco’s profits have again been hit hard as its bosses added £345 million to the huge costs of its international adventures by confirming a joint venture in China.

The supermarket also struggled in the UK, its largest market, where sales remained flat in the three months to the end of August, a slight improvement on the 0.9% fall for the previous quarter.

Its performance was eclipsed by smaller rival Sainsbury’s, which recorded 35 quarters of like-for-like sales rises, up 2% over the three months to end-September.

Sainsbury’s chief executive Justin King said: “It is really pleasing when you consider the comparisons with last year when we had the Paralympics. We can only take each quarter as it comes but customers are clearly pleased with our offering.”

By comparison, Tesco chief executive Phil Clarke, was less upbeat, revealing pre-tax profits fell 24% to £1.39 billion for the six months to end-August.

He said: “The UK business is getting stronger and we are starting to see this coming through in the numbers, but this is not translating into better group numbers due to the challenges in central Europe. Our central European business has been disappointing with a greater-than-anticipated decline in profits.”

Turkey, in particular, has been a problem for Tesco, with like-for-like sales down 12.8%. Clarke said the business around the wealthier coastline has been successful but not further inland. He said: “Unfortunately, we started expanding to the East near Ankara and they are not doing so well. We’ve got around 30 stores that we need to turn around.”

However, he said Tesco was unlikely to leave the country, despite the problems. The company also revealed a deal has been struck with China’s biggest supermarket group, state-supported CRE, to form a joint venture that will see Tesco take a 20% stake in the 3000 stores operated.

It means Tesco will end its solo Chinese venture, which has failed to turn a profit in recent years, and pay CRE £185 million now, £80 million on completion early next year and a further £80 million on the one-year anniversary.

The international business has suffered even in some of its strongest markets of Thailand, Malaysia and South Korea, with sales in every international market falling in the past six months compared with a year earlier.

In the UK, food sales rose 1% despite tough comparisons with last year’s Olympics. This comes after a major marketing campaign to promote the provenance of its groceries, in particular its meat. But Tesco was dragged down by poor general merchandise sales, although 35,000 Hudl tablets were sold in two days.

King and Clarke agreed customers are still struggling. King said: “Things are getting tougher for our customers, because inflation continues to rise faster than wages.”

Clarke added: “Customers are less worried about the future and less worried about jobs. But they are not seeing that optimism in their wallets, or seeing their pay getting bigger.”