Tesco rejects competition concerns as profits keep soaring

Sir Terry Leahy, the chief executive of Tesco, yesterday shrug-ged off concerns about the impending regulatory inquiry into competition in the UK grocery sector after the supermarket giant surprised investors with an unexpectedly bullish outlook for the rest of the year.

Tesco is at the centre of the Competition Commission's investigation into the UK supermarket sector, given its market share of 32 per cent, streets ahead of its closest rival Asda which commands less than 17 per cent . The anti-trust watchdog is set to publish its findings over the coming weeks and has already fired a shot across Tesco's bows after ruling that its acquisition of a former Co-op site in Slough had harmed competition. Meanwhile, the Office of Fair Trading has launched a separate inquiry into whether the "big four" supermarkets colluded to fix the price of dairy products between 2002 and 2003.

However, Sir Terry was sanguine about the two regulatory investigations, arguing that he was "very confident" about the outcome, given the competitiveness of the UK supermarket sector. "I don't have any concerns about the competition inquiry. The real judge is the consumer. They're the best at picking the winners and the losers... they pass judgement on you every day," he said, adding that 94 per cent of UK consumers had a choice of at least three supermarket outlets. Sir Terry joked: "Luckily, there are more customers than competition enquiries."

He also dismissed as "simply wrong" any suggestion that supermarkets had colluded to fix the price of milk and cheese five years ago, and said that, at the time, the industry was concentrating only on helping struggling dairy farmers.

Sir Terry was in a bullish mood after Tesco confounded expectations of a slowdown in consumer confidence over the summer. Despite reporting its weakest UK sales growth since the turn of the century, Tesco said that the improvement in the weather had stimulated an improvement in like-for-like sales toward the end of a dismal summer, proving that, despite the recent rises in interest rates, consumer confidence remained robust.

Tesco's like-for-like sales in the UK rose 5 per cent in August, a much better rate than the 3.5 per cent it recorded over the first half as a whole. Sir Terry said that the summer was "the wettest and dullest on record", which had hit sales of clothing, gardening equipment, soft drinks and alcohol during the second quarter.

He said the company had overcome those challenges due to the strength of its online and non-food sales and it was "generally upbeat" about its prospects in the UK, which will be given "a further fillip" if interest rates are cut. He said that although Tesco is outperforming its competitors, the overall market "isn't doing that badly".

Shares in the retailer rose 6.3 per cent on the upbeat outlook. Overall, Tesco grew sales across its international businesses by 9 per cent to nearly £25bn, while pre-tax profit increased more than 14 per cent to £1.3bn, driven by continued growth in countries such as China.

Tesco is gearing up for the launch of its new US chain "Fresh & Easy" in California over the coming weeks as the supermarket giant attempts to crack the US market, something no other major UK retailer has achieved.

Yet it will not go head-to-head with Asda's parent Wal-Mart on its home turf by opening giant supermarkets on the edge of towns. Instead, its shops will be smaller convenience stores in the heart of neighbourhoods, a concept that Sir Terry believes will appeal to US consumers. He expects Tesco to open 50 outlets by the end of February.