Tesco beats forecasts with Christmas sales rise

Tesco has impressed investors with much better than expected sales over Christmas after it cut prices and boosted customer service by putting thousands more staff in stores.

Shares in Britain’s biggest retailer rose 6% to 168p as it revealed a 1.3% rise in sales at established UK stores in the six key Christmas and new year shopping weeks. Analysts had been expecting a grim trading update – with sales down by up to 3% until industry data released this week indicated Tesco had turned things around in December.

The chief executive, Dave Lewis, who joined Tesco in 2014 to lead a revival of the supermarket after a dramatic slide in sales and profits, said the group had sold more items to more shoppers after it reduced prices on an improved range of products and stepped up its customer service.

“These results show another step in the right direction. We were more competitive than last year,” Lewis said. But he added: “We are obviously pleased with the performance over Christmas but I don’t think it takes away from conditions that make the market extremely challenging. We recognise there is progress but we continue to see more to do.”

Tesco had simultaneously released a trading update for a longer period – the three months to 28 November – and it showed sales at established UK stores down 1.5%. But that was still well ahead of expectations and Lewis said that during the previous year Tesco had been issuing a lot of discount vouchers.

This Christmas Tesco issued a quarter less discount vouchers than 12 months earlier and Lewis said the grocer had moved away from voucher promotions to lower basic prices. He is expecting food price deflation, which stood at between -1.7% and -2.4% over the quarter, to continue for at least the next year. Lewis said Tesco had cut its own prices by between 2%-2.5% over that period.

Over Christmas, Lewis said Tesco had reduced the price of seasonal goods such as turkey, stuffing, vegetables, mince pies and Christmas puddings by an average 5%.

Sainsbury’s and Morrisons also reported better than expected trading over Christmas, in a sign that Britain’s big supermarkets are finally fighting back against the rapidly expanding German discounters.

Some analysts estimate that sales at established Aldi stores rose by less than 1% in December as it made its lowest gain in Christmas market share since 2012. But Lewis insisted it was too early to suggest that the traditional chains had Aldi and Lidl on the back foot.

Sainsbury’s festive sales were still lower than the previous year, falling by 0.4%, but that was well ahead of City forecasts for a fall of 0.7%. Morrisons reported a surprise rise in sales of 0.2%, its first increase in four years.

Tesco said it expected to meet profit expectations as its performance over Christmas was boosted by better availability of products on the shelf and more on-time home deliveries.

“The improvement in the operations is not visible to everybody but we have spent a huge amount of time redesigning the organisation. There has been a fundamental shift in the way we run Tesco, notably in the UK but also in central Europe and Asia,” said Lewis.

Lewis said a range of changes had helped Tesco’s largest supermarkets – the Extra stores – to achieve sales growth over Christmas after several years of decline.

In the three months to 28 November, however, sales were still down in the largest stores, which have been hit by the rapidly rising popularity of small neighbourhood stores and online shopping. Lewis said it was unclear if they had really turned the corner.

But he said: “This idea that big stores are a weight around our neck or some sad dinosaurs clearly hasn’t been the case. As we have improved the offer … people have seen they can get everything they need under one roof and that is the most convenient form of shopping.”

The retailer’s Tesco Express convenience stores also performed well, with sales up 3.5% at established stores.