The Investment Column: Tesco takes the biggest bite

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Tesco confirmed itself as top dog in the viciously competitive supermarket sector yesterday and saw its shares close 5p lower at 297.5p. Having been slaughtered on the petrol forecourts, the figures suggested a robust performance from food and analysts worried that the likes of Asda would be unlikely to sit back and let them get away with it in the second half. Sir Ian MacLaurin dismissed talk of another price war but the pressure is plainly on again.

That said, increasing market share from 13 per cent to 14 per cent, increasing profits by 11 per cent to pounds 321m on a 14 per cent sales rise to pounds 6.72bn, and pushing the dividend 6.6 per cent higher to 3.25p was an impressive performance. Sales of fine wines and ready meals underline the return of some sort of feelgood factor but the supermarkets are having to work hard to generate this growth.

Tesco has overtaken its rivals by doing things earlier and better. Initiatives such as providing 5,000 customer assistants to pack bags may not be rocket science but they work if you can do them before the competition.

Tesco's ClubCard similarly stole a march on Sainsbury's Reward and Safeway's ABC cards by virtue of hitting the market a year earlier than its rivals. Analysts believe Sainsbury is struggling to achieve the extra 2 per cent of sales it needs to cover the cost of giving away discounts and air miles.

In a mature market, those sort of programmes are the only way to achieve growth. We already spend pounds 100bn a year on groceries and are unlikely to spend a great deal more so expanding can only be at the expense of other players. That is a hard grind, so Tesco is right to take the battle to easier markets overseas.

Doing the right thing means little, however, if the market is against you and it is hard to see the UK grocery market ever being anything other than hugely competitive. Home delivery and Internet shopping may be small beer now but they are another cloud on the horizon.

Forecast profits of pounds 745m this year and pounds 820m next time mean the shares trade on a prospective price earnings ratio of 12.7, falling to 11.7. That is cheaper than the market average but so it should be. Fairly priced.