Branding for a Tesco store is seen in west London.

London - Britain's biggest retailer Tesco recorded its worst quarterly UK sales drop in 40 years on Wednesday, ratcheting up the pressure on boss Phil Clarke to show his turnaround plan can counter the challenges of the grocery industry.

British consumers are shopping around to save money, wasting less and turning to fast-growing discounters such as Aldi and Lidl or Waitrose and Marks & Spencer at the top end of the market.

The once-mighty Tesco has posted two straight years of profit decline.

With its key measurement of underlying sales at British stores down 3.8 percent in its fiscal first quarter, Clarke is accelerating an investment programme to rebuild the 95-year-old group and is cutting prices to try to woo back shoppers.

But with rivals Wal-Mart's Asda and Morrisons also promising price cuts and Sainsbury's vowing to remain competitive some analysts think Tesco needs to lower prices even more.

That has raised concerns about a possible price war hitting earnings across the industry.

“Clarke needs to reconstruct Tesco in a world of lower profits, lower market share and an internet-enabled shopper,” said John Ibbotson, director of the retail consultants Retail Vision.

“We need to remember that it's twice the size of its nearest rival so is still in a strong position to reassert its dominance of the UK grocery market. (But) Clarke's only option now is to get out the big bazooka and blow the competition away.”

Clarke is two years into a multi-billion pound turnaround plan for its British business which contributes two-thirds of sales and profit for the group, the world's third-largest retailer after Wal-Mart and Carrefour.

Tesco said sales at UK stores open for longer than a year, excluding fuel and VAT sales tax, fell 3.8 percent in its fiscal first quarter, hurt by the price cuts deflating sales, a reduction in untargeted promotions, and the weak overall market.

It said it expected tough times to continue.

Analysts had forecast a decline of 3.5-4.1 percent, after a fall of 3 percent in the fourth quarter of the firm's 2013-14 year.

Tesco shares, down 17 percent over the last year, were down 1 percent at 10:34 SA time, trading close to six-year lows.

Though the outcome was better than some analysts feared after the release of weak market share data on Tuesday, one Tesco shareholder said the figures were “shocking”.

“I find it difficult to see what the strategy actually is. It's difficult to see how things are going to improve. They are trying to be too clever and please everybody but you can't do that. Despite the upbeat spin, sales are still woeful,” said the investor.



Clarke, a 40-year Tesco veteran, told reporters he could not recall a weaker quarterly performance in his career but insisted his strategy was working and said he was pleased with the response of customers to four waves of price cuts and refreshed stores.

He reiterated that he has no intention of stepping down.

“The plan is working ... We've cut prices and they've brought down our like-for-like sales in the short term but we're now much more competitive and volumes on the lines we've cut are up over 28 percent,” said Clarke, adding there was “more to come” on price cuts.

But he again cautioned that like-for-like sales would continue to be negative as price cuts hit sales going through the till if they are not offset by volume gains and as stores are disrupted by modernisation work.

“I see every day the improvements that are coming in the business but I'm not making any promises about sales improvement in the next few quarters,” he said.

Tesco is battling a British grocery market growing at its lowest rate for 11 years as stagnant wages keep consumer spending in check. British consumers are shopping around, shying away from big weekly shops and buying little and often in local convenience stores or online.

Tesco has spent billions on store refits, staff, product ranges and online services, and dropped an industry leading profit margin target but has so far failed to deliver any improvement in underlying sales.

“The key concern now is that if UK like-for-like sales growth rates continue at this level then management might need to consider cutting capital investment again,” analysts at Cantor said.

“Tesco management should provide more evidence that the current strategy is working otherwise we could expect UK margins to fall below the current 4.5 percent (down 50 basis points) this year.”

Tesco's international sales did, however, show some improvement in the first quarter.

Group sales over the quarter fell 0.9 percent. - Reuters