Tesco to serve up new jobs for 10,000

News Analysis: Supermarkets may advertise cheaper food, but a price war is not in their interests

TESCO YESTERDAY claimed that an all-out supermarket price war was unlikely, although it conceded that the food sector was becoming more competitive and that sales growth was slowing.

Reporting a 6 per cent rise in first-half profits to pounds 371m, Tesco said its like-for-like sales had grown by 4.3 per cent in the period, slowing to a 2.5 per cent rise in the first five weeks of the second half.

Tesco said it was continuing its strategy of offering lower prices on its Value range for customers who wanted to trade down to cheaper products, while also extending its Tesco Finest range of more expensive, quality foods.

"There is a slowdown but I wouldn't call it a major recession and it is nothing like 1991-92," said David Reid, Tesco's deputy chairman. "It is not the end of the world, but the difference is that consumers' psyches can change."

The supermarket group is pressing ahead with a pounds 500m expansion programme this year that will see it create 10,000 new jobs, or 6,000 full-time equivalents. The positions will be created through new store openings, longer trading hours and store refurbishments: 22 new stores will be opened, while the number of stores offering 24-hour opening will rise from 24 to 64. Tesco said it had increased its market share from 14.6 per cent to 15.2 per cent, according to recent industry figures.

While Tesco's figures were ahead of expectations and its sales growth ahead of the industry average of just 1 per cent, the outlook for Britain's high-flying supermarket sector has become increasingly uncertain.

It is in the midst of an Office of Fair Trading investigation which will decide if the major supermarkets exploit their huge buying power to make excess profits. Inflation has all but disappeared, making sales growth more difficult to achieve.

Also, the threat of a price war has reappeared after a long period of relative stability. Asda and Sainsbury's have launched price promotions in the last few days, and Tesco has said it too will cut prices.

Tesco yesterday took issue with all of these concerns. On the OFT inquiry, the company says it believes there is no case to answer.

Responding to accusations that the supermarkets used their power to cut prices paid to farmers for meat, but failed to pass those savings on to consumers, Tesco's finance director, Andrew Higginson, said: "We make no money on meat." He said the difference between farm prices and those that are charged at the supermarket check-outs was accounted for by improved meat processing arrangements and other cost increases in the food chain.

Mr Higginson said the supermarkets were facing a cost squeeze as food price inflation disappeared while other costs, such as wage settlements, continued to rise.

Analysts agreed that the OFT inquiry was unlikely to lead to any action. Clive Vaughan of Verdict, the retail consultants, said: "We have a premium food retail sector in this country, because that is what consumers want. They do not want to shop in big cheap sheds. They had that 20 years ago with people like Tesco, and it failed."

Although an internal Treasury report has showed that British consumers pay higher prices than Americans for food and drink, experts say there are several obvious reasons for this. One is that America is one extremely large single market with no import duties to increase prices. Other factors include lower land prices, which mean lower store rent costs, and far lower vehicle fuel prices, which cuts the cost of distribution.

Further support for the supermarkets' position is expected to come in the next few days in a McKinsey report on global competitiveness. It is thought that the report will single out UK food retailing as one of the most efficient and competitive sectors.

Analysts said a food price war was unlikely because it is not in the supermarket operators' interests to launch one.

"These latest price campaigns are really just posturing," says Clive Vaughan of Verdict. "They have switched their advertising campaigns from quality and range to price to show the competition authorities that they are offering good value. It all has a political background."

Paul Smiddy, food retail analyst at Credit Lyonnais, agreed. "The odds must still be on the OFT exonerating the big supermarkets," he said. The OFT is due to deliver its preliminary report in December.

Although trading conditions in the mature UK food market are now becoming more difficult, Tesco again highlighted its global ambitions yesterday.

The company said that the expansion of rivals such as Wal-Mart of America, Carrefour of France and Metro of Germany made it important for UK groups such as Tesco to be able to benefit from similar economies of scale.

"We would welcome the opportunity to become larger in the UK so we can compete on the world stage," said Mr Reid. "Otherwise they [the major global rivals] will come here and buy up some of our companies."

Tesco's overseas stores at the moment account for just 2 per cent of group sales. The supermarkets in Poland, Hungary and Czech Republic recorded a pounds 5m loss on sales of pounds 130m.

The Lotus outlets in Thailand, acquired earlier this year, have recorded a pounds 1m loss on sales of pounds 30m since they became part of the group in May.

Tesco's group sales rose by 7.2 per cent to pounds 8.2bn in the first half of the year. The interim dividend was raised by 6 per cent to 1.25p per share.

The shares, which have fallen from their 202p peak in July, rose 8p to 169p.

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