Tesco blames drop in half-year profits on Europe

The UK's biggest supermarket chain, Tesco, has reported a 23.5% drop in profits during the first half of its financial year.

Tesco's pre-tax profits in the six months to 24 August were £1.39bn, which the firm blamed on a challenging retail environment, particularly in Europe.

UK like-for-like sales - which exclude new store openings - fell by 0.5%.

Shares in Tesco initially fell 4.4%, before recovering to close just 0.3% lower at 358p.

Rival Sainsbury's reported a 2% rise in like-for-like sales during the second quarter of its financial year.

Competitive grip

Tesco said profits fell 67% in Europe to £55m, while Asian profits, excluding China, dropped 7.4% to £314m. UK trading profits rose 1.5% to £1.13bn.

Tesco also saw margins being squeezed, in what is already a notoriously competitive retail environment. Group profit margins fell from 5.4% to 4.9%.

Sainsbury's was the only one of the "big four" supermarkets to increase its market share in the 12 weeks ending 15 September, according to the latest figures from Kantar Worldpanel. Its market share rose 0.2% to 16.6%.

Tesco's market share fell to 30.2% from 30.9% over the period, although it is still considerably larger than its nearest rival Asda, which has 17.3% of the market and also saw its share drop.

Last year, Tesco announced it would be spending £1bn on improving its stores in the UK, investing in shop upgrades, product ranges, more staff, as well as its online offering.

As well as its traditional competitors, the firm is fighting an increasingly tough battle with discount supermarkets such as Aldi and Lidl.

Investors don't think Tesco's turnaround is in the bag yet

Aldi saw UK pre-tax profits surge 124% to £157.9m in 2012, with the company saying it attracted a million more shoppers through its doors.

Tesco has also beat an expensive retreat from the US, recently agreeing to sell 150 of its Fresh & Easy stores to the investment company Yucaipa Companies.

'Less pessimism'

Tesco's chief executive, Philip Clarke, said the retailer was making progress and was strengthening its UK business, but he saw little improvement in consumers' spending power.

"There is less pessimism around, but customers are still not seeing real disposable incomes improve," he told the BBC's Today Programme.

"They are, perhaps, feeling a little better about the future," he added.

Neil Saunders, managing director of retail consultants Conlumino, said that as Tesco continued with an organisational overhaul, results needed to show signs that it was moving in the right direction.

"Against this standard it is fair to say that Tesco is making some progress, especially on the UK front," he said.

"However, they also indicate some more worrying signs that there are a number of deep seated issues on the international scene that need to be addressed."

David Gray, retail analyst at Planet Retail, noted food sales had held up, fuelled by warm weather in July and August and its food-focused "Love Every Mouthful" marketing campaign.

"We expect to see further positive news on food sales in the months ahead as improvements to product ranges come through," he said.

Tesco said it was seeing little improvement in consumers' spending power

Tesco's results came as the firm announced a joint venture with China Resources Enterprise (CRE).

The UK firm will combine its Tesco China business, which includes 134 Chinese stores, with the 2,986 stores held by CRE's Vanguard business.

Tesco will have a 20% stake in the business, which it said would have sales approaching £10bn.

Outperforming

Sainsbury's chief executive Justin King said his firm was the only major supermarket increasing its market share.

"Our groceries online business grew by over 15% in the quarter and is now worth over £1bn in annual sales." he said.

"Our convenience business grew 20% year-on-year as customers topped up more frequently during the warm summer weather."

Sainsbury's said sales of its own-brand products had continued to rise at more than twice the rate of branded goods, with its premium Taste the Difference range growing particularly strongly.