Tesco stays top grocer with profit of pounds 681m

Tesco strengthened its position as Britain's leading grocery retailer yesterday when it reported a 14.5 per cent surge in profits to pounds 681m, along with a bullish message on current trading and an increase in spending on new stores and refurbishments.

Tesco claims that it has increased its share of the UK grocery market from 12 per cent last year to 13.6 per cent, maintaining its lead over Sainsbury's. Sainsbury's has yet to release its figures but had a share of 11.5 per cent last year.

David McCarthy, food retail analyst at the stockbroker BZW, said the figures proved that the price battle between the supermarkets was really just a "phoney war". "We've had price wars on turkeys, bananas, petrol and now baked beans. But Tesco's margins have only fallen by a fraction. If prices are falling on some products they are being increased elsewhere to make up for it. There ain't no price war out there."

Tesco, chaired by Sir Ian MacLaurin, reported that, excluding new store openings, its sales had increased by almost 9 per cent last year. In the five weeks to Easter sales continued to rise strongly by 7 per cent.

However, the petrol price war is causing some damage and will cost Tesco up to pounds 30m this year as the company moves to match the Esso PriceWatch campaign. David Malpas, Tesco's managing director, said: "Our feeling is that the present price position will continue for another 18 months or so and it will be uncomfortable. But we intend to be one of the people left standing at the end of it and hope to emerge in a stronger position. We won't be beaten on price." Elsewhere, the BSE scare on beef has cost Tesco up to pounds 10m so far on discounted stock and the cost of increasing supplies of other meats.

The baked beans battle, with the price of a can falling to 3p, is proving a significant loss-maker as Tesco buys its beans at 14p a can. It is continuing to ration shoppers to four tins per customer to maintain stocks. "It's a very silly situation and we hope it won't continue for too long," Mr Malpas said.

As well as reporting that its Clubcard loyalty scheme had now signed up 8.5 million members since its launch last year, Tesco unveiled an aggressive store opening programme.

It will open 24 new stores this year including 10 superstores, up to six city-centre Tesco Metros and six branches of Tesco Express, the new format where a petrol station has a convenience store attached. Mr Malpas said the Metro stores were profitable in spite of the higher rents in prime locations. He added that the Express format appeared popular with customers although its performance had been clouded by the petrol price war. Seven stores will be opened in Europe. Capital expenditure will rise above pounds 700m this year, ahead of expectations and higher than last year's figure of pounds 649m. Profits of pounds 681m, excluding a pounds 6m loss on disposal of fixed assets, were struck on a 20 per cent increase in group sales to pounds 13bn in the year to 24 February. The dividend rose by 11.6 per cent to 9.6p. The shares fell 3p to 287p.

Investment column, page 22