Tesco profits grow but UK sales subdued

Supermarket group Tesco has reported a rise in half-year profits despite a fall in underlying sales in the UK.

Pre-tax profit for the 26 weeks to 27 August was £1.9bn, up 12.1% on a year earlier. Group sales rose 8.8% to £35.5bn, but like-for-like UK sales excluding VAT and petrol fell 0.5%.

The company highlighted "excellent growth" in Europe and Asia but also "subdued demand" in the UK.

Rival Sainsbury's reported slightly better like-for-like sales.

Excluding petrol but not VAT, Sainsbury's sales rose by 1.9% for the first six months of the financial year. The equivalent figure at Tesco was a rise of 0.5%.

Sainsbury's chief executive Justin King said: "We have delivered a good sales performance in a tough consumer environment."

Despite Sainsbury's stronger sales, analysts said Tesco was in a better position to outperform long term.

"Sainsbury's may have pipped Tesco at the post in terms of growing UK sales, but for overall prospects Tesco remains the darling of the sector," said Richard Hunter at Hargreaves Lansdown.

'Weak' sales

Tesco contrasted the "challenging conditions" in developed countries, particularly the UK and the Irish Republic, with "continued strong growth in emerging economies".

The company said "weak" sales in the UK were not helped by slowing demand for non-food items, particularly in electronics and entertainment, two of its largest product groups.

It also highlighted the high price of petrol and its impact on general consumer spending.

Despite the fall in like-for-like sales, trading profits in the UK rose by 4.5% to £1.3bn.

Tesco makes about two-thirds of its sales and profits in the UK.

In an interview with Reuters news agency, the head of the British Retail Consortium, Stephen Robertson, said retailers were "finding life extremely difficult".

He said underlying costs were increasing and margins were being squeezed.

"I think we've probably got another 18 months of real challenge," he said.

Outside the UK, Tesco has seen an improvement in sales.

In the US, like-for-like sales excluding petrol grew by almost 12%. The company said its plan to break even in the country in the 2012-13 financial year was "showing promising early results".

Like-for-like sales in Europe grew by 1% and in Asia by 3.8%.

Price cuts

Tesco has been reducing prices on about 3,000 items in the UK in an attempt to attract new customers, but analysts said that it was recovering this money elsewhere.

Having increased the number of points rewarded for every pound spent on its loyalty card scheme, the company was now reducing it again, Rahul Sharma at Neve Capital told the BBC.

"As part if its new price campaign, they're cutting the discount [from loyalty cards] from about 2% to 1%," he said.

"They are cutting prices by £500m, which roughly works out at 1%-1.5%, but then they're taking this back [by cutting the points available through loyalty cards]."

Tesco chief executive Philip Clarke told the BBC that reducing the number of points given out on loyalty cards had given the company an extra £350m to help reduce prices.