Tesco has suffered its weakest sales growth since the mid-1990s after targeting cash-stretched customers with cheaper brands.
Britain's biggest supermarket chain reported this morning that like-for-like sales, excluding petrol, rose by 2% in the last three months – just half the growth achieved in the previous quarter.
In an unusually gloomy quarterly trading update, Tesco chief executive Sir Terry Leahy said: "We are pleased with our progress, but we are also realistic – the current economic climate and the strain this is putting on consumers everywhere is something that all businesses are feeling, including ours."
He said the business faced "new challenges" and that he was "managing our balance sheet and cash carefully". One City analyst suggested last week that Tesco may be among companies which needed to launch a rights issue. The grocer said it had no such plans.
The sales figures underlined the difficulties facing the UK retail sector as the recession bites, with high street names such as Marks & Spencer holding 20%-off one-day sales to try to stimulate sales, and Moss Bros issuing a profit warning yesterday. John Lewis has reported sales down by some 13% on last year's levels for the past three weeks.
However, Tesco's figures are markedly worse than sales data produced recently by rivals Sainsbury and Asda. Sainsbury revealed recent like-for-like sales up 3.9%, while Asda grew 6.9% in the three months to the end of September. Morrisons, the UK's fourth-biggest grocer, is expected to report like-for-like sales growth of 7.2% later this week.
A Tesco spokesman said the sales figure was the lowest since 1994, and that it was due to the popularity of its new cut-price Discounter range, launched to lure customers from Asda, Lidl and Aldi.
"We have taken a deliberate decision to get even cheaper for customers by launching our Discounter range, cutting prices across the store and introducing hundreds of new promotions. Clearly this hits the value of sales, but it has attracted 300,000 new shoppers a week to our stores. We think this is the right strategy to help our business and our customers through the tougher times ahead," said the spokesman.
The discount supermarket sector has profited from the economic turmoil this year as rising inflation, especially for food, has prompted many shoppers to trade down and choose cheaper stores and brands.
Tesco said sales of organics and its Finest range have gone into reverse. At the same time its Discounter ranges, which, including the "Market price" fruit and vegetable ranges now number nearly 800 lines, had wiped 2%-3% off sales. One in four Tesco shoppers are buying from the new range and they account for 5% of goods going through the tills. The Discounter range was the first major change in range since the Value brand was created in the last recession.
Director Lucy Neville-Rolfe said the cheaper labels were taking sales from premium brands and own-label products.
Separate data revealed today, however, questions how successful Tesco's Discounter range has been at preventing customers defecting. The Times reported this morning that "switching data", which is usually secret, shows that £22m of spending moved from Tesco to Asda in the 12 weeks to the start of November, with another £10m moving to Morrisons.
Tesco increased total sales by 11.7% during the last quarter, helped by strong international sales. "The main highlight [of these sales figures] is that our sales are up 11.7%," said Neville-Rolfe. "It shows the wisdom of our international strategy over the last 11 years."
The grocer's Asian stores are performing best, with sales ahead 29% on the same period last year. Earlier this year, Tesco bought Homever, a 36-strong discount chain based in South Korea.
In Europe, however, sales growth has fallen back to just 6% at constant exchange rates. Neville Rolfe said Hungary and Turkey were the worst Tesco business areas. "It has been dire in Hungary for two or three years. Turkey is another area where consumers are tightening their belts," she said. But the grocer "remained committed" to both countries, she said.
In the UK the grocer's non-food ranges showed "a small decline", which Neville-Rolfe said was "a good performance compared to others on the high street". She said clothing sales were still showing growth and that laptops were "selling like hotcakes". Big-ticket items, however, were selling far less well, unless they were offered at heavy discounts.
The big grocers are locked in a price war to tempt reluctant shoppers. Last week Asda described its reductions as its "most aggressive price campaign ever" and promised "wave after wave after wave" of cuts in the weeks before Christmas. Its move came just hours after Tesco unveiled a range of reductions on big-ticket items such as children's bicycles and televisions.
Retailers are becoming increasingly anxious about the outlook for Christmas as consumer confidence is battered by the recession and rising fears. Tesco welcomed the "major fiscal stimulus" provided by the pre-Christmas cut in VAT, but said the new year was a bigger worry. "People always want to spend at Christmas", said Neville-Rolfe. "More interesting is what will happen in January and February".
Though inflation is now falling back, the Bank of England is expected to cut interest rates by as much as a full percentage point on Thursday.
The grocer said it had identified £90m of extra cost cuts and put a cap of £4bn on its capital expenditure for next year. Neville-Rolfe ruled out Tesco taking over a large number of Woolworths stores, should they become available, saying only that the company might be interested in "the odd store".
Tesco shares rose almost 10% today to 314.5p in afternoon trading, with investors relieved that the sales growth was not worse.
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