Tesco CFO Laurie McIlwee today (8 December) defended the results of the retailer’s Big Price Drop promotional campaign after the company reported another quarter of falling UK sales.
McIlwee said he was “pleased” with the early performance of the campaign, which was launched in September, despite underlying UK sales falling in the retailer’s third quarter.
Total UK sales, excluding fuel, were up 3.7% but like-for-like sales, without petrol sales and the impact of VAT, were down 0.9% in the three months to 26 November – the fourth consecutive quarterly fall.
Tesco has claimed it has cut GBP500m from the price of thousands of items to try to lure cash-strapped UK consumers away from its competitors. “What we are trying to do is confirm with our customers is that the core products you buy every day are going to be the cheapest at Tesco. That’s a behavioural switch that takes a time to do,” McIlwee said. “It looks like it’s happening. I’m pleased with the early progress but it’s a medium-term strategy. It takes time to do.”
McIlwee said Tesco’s seen “an improvement in our volume of about 1%” during the quarter and added that its volumes were growing two percentage points faster than its rivals.
He admitted that the Big Price Drop had “brought our prices down to the extent that there is an extra 1% deflation on our sales numbers”. However, he said the increase in volumes had offset the lower prices, with the fall in underlying sales flat sequentially when compared to the second quarter.
“After just nine weeks, if we can get a performance that neutralises the deflation with volumes up, that’s pretty good,” McIlwee said.
Analysts reaction was mixed. In its trading update, Tesco characterised the early results of the promotional push as “promising”. Seymour Pierce analyst Kate Calvert said that reaction was “not particularly encouraging” and lowered her forecast for pre-tax profits in 2012. She also lowered her rating on Tesco’s shares from ‘buy’ to ‘hold’.
However, Tesco said the Big Price Drop campaign had helped increase sales volumes, which pleased other City analysts. “The centre of interest within the core business to us is not so much the overall momentum of like-for-like sales but whether Tesco has generated a better volume performance in its food business,” Shore Capital analyst Clive Black said. “We are encouraged to see that Tesco management is indeed stating that it is achieving a stronger grocery volume performance.”
Shares in Tesco, which initially fell in the wake of the trading update, closed up 0.08% at 397.2p.