View From City Road: Tesco chirpy at the margins

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Sir Ian MacLaurin, chairman of Tesco, was struggling hard to keep the smirk off his face as he announced interim results yesterday, and who can blame him? Sales volumes are rising steadily, and for all the talk of price wars the company is enjoying a 1.5 per cent overall rise in prices. Margins, meanwhile, seem to have stabilised. And in William Low, Tesco has also just pulled off what could be one of the sweetest deals of the decade, even though Sainsbury ensured that it did not get the bargain it had hoped for.

What a contrast to a year ago. Then, sales volumes were falling, it was warning of increasing pressure on margins and there were worries that its price-cutting strategy - typified by the ultra-cheap Value lines - would alienate more customers than it won back.

Tesco is not the only one to have enjoyed a renaissance: food retailing has been the best-performing sector in the last quarter as it has become clear that Armageddon will not, after all, be enacted in Britain's high streets.

It would be unwise to get too carried away, however. Competition in the high street remains intense and the chances of significant increases in margins must remain remote - particularly as much of the cost-cutting programme is now complete. The tail- off in like-for-like volume growth indicates how hard it is to sustain sales momentum now that customers have adjusted to lower prices.

It may be right that the Low acquisition will help it save on buying costs but, given that it will represent less than 5 per cent of its business, the impact on Tesco's overall margins will be slim.