Tesco reports fall in half-year profits

Chief executive Philip Clarke told the BBC that Tesco is "making improvements that customers will notice"

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The UK's biggest supermarket chain, Tesco, has reported its first fall in profits since 1994.

Pre-tax profit for the six months to 25 August came in at £1.7bn, down 11.6% from the same period last year.

The fall in profits was largely due to spending on the retailer's £1bn investment programme to improve its UK stores, which was announced by chief executive Philip Clarke in April.

Also on Wednesday, Sainsbury's reported 1.9% growth in three-month sales.

The new norm

Sainsbury's sales growth outpaced that of Tesco's where UK like-for-like sales - which exclude the effect of new stores - in the three months to 25 August rose 0.1% excluding fuel, the first rise for seven quarters.

Analysis

Tesco is investing £1bn in its UK stores and the money is beginning to show, although little of it is revolutionary.

At the store in Amersham, Buckinghamshire, where it is trying out some of its new ideas, you can barely move for friendly signs and staff in bright, yellow "Here to Help" sweatshirts.

But most eye-catching was the big, red rack of Scan as you Shop scanners, which allow you to register and pack all of your own shopping as you go around, and just pay at the end.

There may turn out to be annoying things about it, as some find with the self-checkouts, but it feels innovative and should be a big attraction for gadget enthusiasts (although it must be admitted that Waitrose had the system first).

Mr Clarke put that down to the investment programme, which has already put 8,000 additional staff in existing stores at a cost of £200m a year.

He also said that the Everyday Value range was growing fast due to the pressure being felt by customers.

"They tell us they're resigned that this is the new norm. They don't have great expectations that things are going to improve in the short term," he told BBC News.

"They're hit by fuel prices, they're hit by taxes, real incomes aren't growing so people are having to adjust and what we see is that they are starting to buy into supermarket brands more, they're starting to buy our Everyday Value range... [which] is up 10% like-for-like."

Neil Saunders from retail analysts Conlumino was unimpressed by the figures.

"Those looking for a quick turnaround from Tesco will be disappointed by this latest set of results which underlines the fact that problems at the UK's leading grocer are fairly deep rooted and will only be remedied with both time and investment," he said.

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The UK's biggest retailer is looking more mortal and vulnerable than in many years”

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"In the UK, like-for-like sales growth has certainly improved since the last quarterly update, but this appears to have been mainly driven by increased levels of discounting and promotional activity, especially in the form of couponing."

Korea problems

Outside the UK, Tesco also had problems, with international profits down 17.1% to £378m in the six-month period.

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There were particular problems in South Korea, which is its biggest market in Asia, where new regulations have restricted opening hours for big retailers.

Tesco said those regulations were likely to cut its profits by about £100m in the full year.

Its stores now have to close for two Sundays a month and are only allowed to stay open from 0800 until midnight. Sunday is the biggest trading day in Korea.

Tesco also said that conditions had been challenging in China, where consumer demand was not keeping up with the pace of new store openings.

In Europe, the retailer said it had been hit by eurozone austerity measures as well as the weakening euro, which meant the value of its sales had fallen 6.8% in the half.

Sainsbury's sales

BBC business editor Robert Peston said: "What may concern Tesco's shareholders is that figures from Sainsbury's, also published today, show that this smaller competitor is continuing to take market share from Tesco - with underlying growth that is stronger than at Tesco."

Like-for-like sales excluding fuel at Sainsbury's rose 1.9% in the three months to 29 September.

Sainsbury's chief executive Justin King: "We have been growing for 31 quarters, that's nearly eight years"

"This has been a unique and special summer, during which we have delivered another quarter of good sales, outperforming the market in what remains a challenging retail environment," said chief executive Justin King.

"Our own label penetration is increasing at a faster rate than any of the major supermarkets; a testament to the investment we have made in the quality of our products."

Mr King warned that "we expect the challenging economic backdrop to persist", but added that, "we are positioned to perform well coming into the important Christmas period".

Retail analysts Verdict Research said: "While Sainsbury's is steaming ahead Tesco is struggling to recover real growth."

It said that Sainsbury's Brand Match promotion was helping to drive sales.

"The instant coupon-at-till refund reassures Sainsbury's shoppers that there is no need to switch away," said Cliona Lynch, senior analyst at Verdict.

Earlier on Wednesday, Sainsbury's was criticised by the Advertising Standards Authority and ordered to change its Brand Match campaign for misleading consumers over the finer details of the promotion.

Sainsbury's said it had already changed its advertising, and Verdict said the ASA's ruling would have little impact.

"[The] ASA's ruling on Brand Match, which relates to advertising now almost a year old and no longer in use, will not hamper the resonance of the message with customers," said Ms Lynch.

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