Tesco leads the way as price pressures continue

Related tags Cent Tesco Asda Supermarket

Britain's biggest supermarket group Tesco continued to out-perform
its peers over the Christmas period, bucking the general trend of
flat or declining sales with an impressive 7.6 per cent rise in
like-for-like sales. And with the downward pressure on prices
expected to dominate throughout 2005, the company is likely to pull
further ahead of the pack, writes Chris Jones.

While rivals such as Sainsbury were congratulating​ themselves on keeping the decline in Christmas sales to 'just' 1.3 per cent, Tesco was basking in the glory of a performance which saw it outperform not only the rest of the food retail sector but pretty much all the other British retailers to boot.

Total growth for the seven weeks to 8 January was 13 per cent, with like-for-like sales up 9.3 per cent or 7.6 per cent excluding the impact of strong petrol volumes.

Tesco gave no more details in its brief trading statement except to add that its international sales had grown by 16.1 per cent over the Christmas and New Year period, despite tough trading conditions in some markets in central Europe.

"The group's strong sales performance means that, despite higher energy and fuel costs and adverse movements in exchange rates, we remain confident that our out-turn for the year will be in line with current market consensus,"​ the company said.

The rise in sales came despite a 1.6 per cent drop in average selling prices at the chain as it continued to its aggressive move towards ever lower prices. Tesco's decision to cut prices once again across a wide range of products in December helped it narrow the gap with the cheapest UK grocer Asda in some product categories, such as vegetables and pet food, although in some key areas such as dairy Asda remains significantly cheaper, according to the latest retail pricing survey from analysts Goldman Sachs​.

This deflationary atmosphere is likely to continue well into 2005, especially as prices at the Safeway chain are brought into line with those of its new owner, Morrisons. Indeed, Safeway was the most aggressive price cutter in January, and has narrowed the gap with Asda from 25.6 per cent in February 2004 to just 6.2 per cent. Further price cuts by Morrisons are expected to narrow the gap further this year.

Perhaps more importantly, Safeway is now cheaper on average than Sainsbury, whose own price cutting measures have nonetheless left it some 7.4 per cent more expensive than Asda, the cheapest operator.

Price cuts will not be the only weapon used by Tesco in the coming year, however. The comapny has said it will follow the route already taken by rival Asda and launch a stand-alone non-food store this year.

The group is yet to decide where the store will be located, but it has already hinted that it will be the first of several stores should the concept prove a hit.

With non-food sales accounting for around 20 per cent of Tesco's UK grocery revenues, the company is keen to increase its share of the market for clothing, white goods, electronics and homeware. At present, it has around 6.5 per cent of the non-food retail market compared to a whopping 29 per cent in the food sector.

The move will also encroach on a territory previously held exclusively by Asda. Owned by US giant Wal-Mart, the pioneer of the hypermarket format in the US, Asda has become the leading non-food grocery chain in the UK, selling its own range of clothing under the George brand for years. Asda recently opened a stand-alone clothing store and a new lifestyle outlet.

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