Tesco's mixed first quarter & Morrison's market outperformance

With international sales continuing to gather momentum, Tesco's first quarter results for the 13 weeks to May 24, 2008 revealed like-for-like sales growth of 3.5% in the UK. The group's international sales were up 13.9%.

These figures are set to get even better as the retailer's new store openings are heavily weighted towards the second-half of the year. In Europe, for example, the retailer has only opened two hypermarkets this quarter, out of a planned 50 openings for the entire year.

Tesco is absorbing inflationary cost increases in food, which are being driven by rising commodity prices. The retailer may be looking for a quick revival of its non-food fortunes in order to boost its margins. Unless it can attract greater numbers of consumers in areas like electricals and homewares, it may well begin to become more aggressive in its food pricing strategy, although its international success does give it some flexibility.

On the sunny side of the street, Morrison’s has continued its recent sales growth and is still outperforming its competitors. In the 13 weeks to May 4, 2008, Morrison's total sales, excluding fuel, were up by 8.6%, of which 1.6% is attributable to new space.

Although growth has slowed since the previous quarter, the grocer is well positioned for future success due to a recent buy back of shares. The company has completed the buy-back of 2.7 million shares to strengthen its balance sheet and its store refurbishment remains on course for completion in July 2008. This process includes the roll out of a new branding and revised 'Market Street' presentation across the board.

With the complications of the Safeway acquisition in the past, Morrison seems keen on further space expansion, particularly in the south of England, where it lacks presence. It is believed that Morrison is considering the purchase of a clutch of Somerfield stores, which the Co-operative Group is likely to be put on the market if it completes its proposed purchase of the chain.