View from City Road: Plenty of openings, but Tesco is falling behind

Poor old South Wales. It has the dubious distinction of having 50 per cent more grocery superstores per person than the national average. Tesco, which still makes as much profit from South Wales as anywhere, was flourishing the region as evidence that there is still huge scope for more superstore openings elsewhere.

It is also discovering that it can turn a decent penny opening slightly smaller superstores (traditionally Safeway's territory). And it is starting to roll out its Metro convenience stores. That dread spectre - saturation - is still years away, the company insists.

But try as he may, the chairman, Sir Ian MacLaurin, cannot disguise the fact that Tesco's sales volumes are going backwards. After stripping out the benefit of new store openings and price inflation, volumes fell by 0.9 per cent in the year to 27 February.

Arch-rivals Safeway and Sainsbury, meanwhile, are still achieving modest like-for-like increases. Without the first-time benefit of Sunday opening, things would have been even worse for Tesco.

While food price inflation is only 2.4 per cent, Tesco's cost inflation is running at around 4 per cent, producing a very uncomfortable gap.

It has provisionally agreed a 2.6 per cent pay rise with the main retail union Usdaw, which is now putting the figure to its members.

Last year's pre-tax profits came in as expected at pounds 580.9m, up 6.5 per cent, on sales of pounds 8.1bn. Operating margins grew from 7.1 per cent to 7.6 per cent.

Interest income shrank as Tesco's 25-stores-a-year opening programme gobbled cash raised in the rights issue. Earnings per share rose 5 per cent to 21.5p.

Shareholders will get a final dividend of 4.85p payable on 1 July, making a total for the year of 7.1p, up 12.7 per cent.

Meanwhile, the chase for customers intensifies.

Gateway - traditionally easy meat for its more efficient rivals - will prove tougher after yesterday's restructuring, which gives it the cash and the breathing space to start fighting back.

Food retailing shares have been clobbered over the past three months. Fears of VAT on groceries did some of the damage, but the larger worry has been the seemingly unstoppable rise of the discounters.

Tesco's 25 new store openings last year ensured it gained market share - from 9.4 to 9.7 per cent. Another 25 this year will do the same thing.

The opening programme should propel it to profits before tax in the current year of pounds 640m and - after a lower tax charge - earnings per share of 23p. Yesterday's closing share price of 232p puts Tesco on a prospective multiple of just 10 times. That is historically cheap and a considerable discount to the sector. But until Tesco demonstrates its sales declines are merely temporary, its shares will remain unpopular.