Food inflation in UK will "accelerate", boosting grocers sales, says analyst

Food inflation in UK will "accelerate", boosting grocers' sales, says analyst

Tesco's flat like-for-like sales at home and abroad should mark the year's "low point" for the retail giant, a leading analyst said today (15 June).

This morning, Tesco said high fuel costs and low food inflation meant UK like-for-like sales, excluding petrol and VAT-adjusted, were up a mere 0.1% for the 13 weeks to 30 May.

The company's overseas like-for-like sales were flat, with the political uncertainty in South Korea and Thailand offsetting continued recovery from the retailer's business in Ireland.

Christopher Hogbin, an analyst at Sanford Bernstein, said rising commodity costs should drive food inflation after a period when low prices had dampened sales.

"The UK performance, in our view, should be considered against the context of sharply lower food inflation," Hogbin said. "We expect that recent increases in food commodity costs should drive an acceleration in food inflation throughout the remainder of 2010, and as such expect the first quarter represents the low-point of grocers' sales performance in the year."

Hogbin also argued that Tesco's "international performance" should "accelerate" as the retailer's moves through the fiscal year as consumer confidence improves - and the company increases floor space.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, called Tesco's first-quarter sales figures "a mixed bag", although he was more downbeat on the retailer's domestic prospects.

"In the UK ... the picture is flat and the likely and impending austerity measures will make life even more difficult. Coupled with weakening demand and easing food inflation, Tesco is struggling to make the kind of headway to which the market has become accustomed. The previously-announced retirement of the CEO adds further uncertainty while Tesco's rivals continue to make their presence felt and threaten slowly to erode its dominant position," Bowman said.