Tesco vows to act on UK sales slump

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Supermarket Tesco admitted today that it must "do better" in the UK after missing growth targets and seeing sales fall on a year ago.

The retail giant promised new products and services after revealing a 0.7% drop in fourth-quarter UK like-for-like sales, excluding VAT and fuel.

Its fast-growing Asian business helped offset a tough domestic market, with Tesco reporting another year of record underlying profits - up 12.3% to £3.8 billion in the year to February 26.

But new boss Philip Clarke said the UK performance was not good enough as it failed to keep up with rivals in areas such as clothing and electricals.

"We didn't achieve our planned growth in the year and this was only partly attributable to the deterioration in the consumer environment during the second half," the group said.

"We can do better and we are taking action in key areas - for example, to drive a faster rate of product innovation and to improve the sharpness of our communication to customers."

Today's sales results mark a tough debut for the new chief executive, who took over from Sir Terry Leahy last month.

The fourth-quarter sales fall marks the first such dip into negative territory for nearly two years.

It last saw sales excluding VAT in the red during the second quarter of the 2009/2010 financial year, when the UK was in the middle of recession.

Mr Clarke vowed to up Tesco's game as part of a six-point plan for the year ahead.

He told the BBC Radio 4 Today programme the group would have to tap into a trend for far more cautious consumer spending.

He said: "Customers are looking for value, they're looking to adjust to higher levels of inflation, to higher levels of tax, to the fuel prices - so they're looking for value, eating out less, using cars a bit less, acclimatising to the economic situation.

"What we've got to make sure we do is set the business up to trade in those circumstances."

The group also hinted at new and improved food lines to improve UK trading and pointed to recent launches, such as its move into the second-hand car market through Tesco Cars, as an example of recent product innovation.

While Mr Clarke stopped short of waging a price war, experts warned the non-food drive could spell further hardship for high street retailers.

Matthew McEachran, at Singer Capital Markets, said: "With over £5 billion of sales and space potentially increasing by around 10% a year, intensification of their offer will result in more pressure for a number of general retailers including those already having to compete harder."

Tesco's UK general merchandise sales dropped 3.3% in the second half as it underperformed in clothing and electricals.

But the group is not the only major chain suffering as UK consumers tighten their belts.

Sainsbury's recently shocked the market with its fourth-quarter figures, which showed like-for-like growth of 1%, implying an underlying fall of up to 1% when VAT is stripped out.

Tesco gave little hope that retail conditions would improve this year.

It said trading would remain challenging, particularly on non-essential items.

Retail analysts were also alarmed by even greater losses in its fledgling US business, with the Fresh & Easy chain slumping into the red by £186 million.

But US sales growth of 9.4% over the year painted an improving picture and Tesco said it remained on track to break even within two years.

The group's strongest growth came from Asia, where trading profits rose 30% to £570 million, or 17.5% up on a constant currency basis.

Together with a robust European division, the two regions contributed nearly 70% of profits growth in the year.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "Tesco's international spread has again come to the rescue as its home market struggles to come to terms with the age of austerity."

Tesco's overall group profits rose 11.3% to £3.5 billion on a statutory basis, while revenues hit £68 billion.

The group said profits from services outside its traditional supermarket business continued to grow, to £583 million.

Tesco Bank saw annual profits rise 5.6% and the group confirmed aims to launch its first range of mortgages this year as it looks to compete against the major high street players.