Tesco struggles for UK growth as Sainsbury strides on

LONDON - Britain's biggest grocer Tesco is expected to report at best flat quarterly UK sales on Wednesday, while on the same day rival Sainsbury will likely report accelerating sales growth as online and convenience stores continue strong.

Tesco has been hit hard by the economic downturn because compared to rivals it sells a higher proportion of non-food items, where consumers have cut back the most. It is also the most affected by the growth of discounters Aldi and Lidl according to JPMorgan Cazenove, until last week Tesco's house broker.

It suggested Tesco could "go through a painful rebasing of pricing and the gross margin, synonymous to a profit warning"though Shore Capital analyst Clive Black said another profit warning like that of January 2012 - then Tesco's first in over 20 years - would go against recent signals from the company.

When Tesco reported full year results in April it said its UK operating profit margin of 5.2 per cent was sustainable and chief executive Phil Clarke placed great emphasis on capital discipline and predictable returns for investors.

Tesco is undergoing a 1 billion pound (S$2.03 billion) recovery plan for its UK market, which contributes over two-thirds of group revenue - though the retailer's share of the market is still showing a year-on-year decline, monthly industry data showed recently.

Along with Sainsbury, Tesco is expected to issue a cautious view of the UK market for the year ahead, even though recent official data and surveys have generally shown an improving outlook for consumer spending.

Analysts polled by Reuters forecast sales at Tesco stores open over a year, excluding fuel and VAT sales tax, in a range of flat to down 0.5 per cent for the 13 weeks to Aug. 24, its fiscal second quarter.

Though that would represent an improvement on a first quarter decline of 1 per cent, it would still raise questions over the effectiveness of investment in store upgrades, products, customer service and marketing.

By comparison, analysts are forecasting for Sainsbury a rise in like-for-like sales, excluding fuel, of 1.5-2.8 per cent - against 0.8 per cent in the first quarter - for the 16 weeks to Sept. 28, its fiscal second quarter.

That would be a 35th consecutive quarter of underlying sales growth, reflecting strong growth online and in convenience stores, more than offsetting declines at its traditional supermarkets.

According to market researcher Kantar Worldpanel, Sainsbury's is the only one of Britain's "big four" grocers, which also includes No. 2 Wal-Mart's Asda and No. 4 Morrisons , to increase its market share over the past year.

Alongside flat UK sales, Tesco - the world's third-biggest retailer behind America's Wal-Mart and France's Carrefour - is also expected to report flat group trading profits for its first half. Analysts polled by Reuters forecast it to show a 1 per cent improvement in Britain offset by a 6 per cent fall in Asia and a 20 per cent drop in Europe.

While Tesco is struggling to turn around its UK business it is also facing serious headwinds in its international markets.

Though it has struck deals to exit its loss-making United States business and fold its unprofitable Chinese operation into a state-run company, it is expected to report very weak trade in Europe and a slowdown in Thailand.

In the first quarter the firm posted underlying sales declines in eight of its 10 international markets.

First half group trading profit is forecast at about 1.6 billion pounds, with the UK contributing 1.1 billion pounds, Asia 260 million pounds and Europe 130 million pounds.