Tesco suffers from weak UK market

London

TESCO Plc started the financial year on a downbeat note as the UK's largest retailer said sales were held back by the political turmoil over the country's plan to leave the European Union.

The supermarket operator's shares fell as much as 3.3 per cent in London early on Thursday after it said domestic comparable sales rose at only half the rate analysts expected in the first quarter.

The results show that Tesco is not immune to the challenges facing other British retailers, which are getting squeezed by competition from discounters, the rise of online shopping as well as the side effects of Brexit.

"The subdued nature we talk about is the consumer sentiment, which is weakening in the UK," chief executive officer Dave Lewis said on a call with reporters. "Some of that is clearly driven by the political situation.''

The governing Conservative Party is seeking a new leader after the resignation of prime minister Theresa May, which followed her inability to secure Parliamentary approval for her Brexit deal. Now the EU exit has been delayed until Oct 31, leaving shoppers in limbo over what comes next.

UK retail sales plunged 2.7 per cent from a year earlier, the biggest drop since at least 1995 when excluding Easter distortions, industry figures showed.

Empty storefronts are multiplying on the country's shopping streets as billionaire Philip Green's Arcadia Group Ltd becomes the latest of a series of retailers to shut dozens of shops.

Tesco also suffered from comparisons against a particularly strong period last year, when it benefited from warm weather and a royal wedding.

The Booker wholesale division, which has been driving growth, continues to expand but was also held back by a similar effect after securing contract wins last year.

Tesco has used its scale to hold down prices, until now insulating it from the troubles faced by rivals like J Sainsbury Plc, whose bid to combine with Walmart Inc's Asda was blocked by regulators.

The deal would have given them the purchasing heft to rival the market leader.

Tesco said it was still growing more rapidly than the overall UK market as it expands its range of private-label items.

But the 0.4 per cent rate in the latest period was a sharp slowdown from the fourth quarter's 1.7 per cent gain.

Through Thursday, Tesco's shares had climbed 20 per cent so far this year.

One bright spot was UK online grocery sales, which rose 7 per cent from a year earlier, Tesco said.

The company faces growing competition in e-commerce, as Amazon.com Inc expands its alliance with Wm Morrison Supermarkets Plc. BLOOMBERG