Horsemeat Scandal Pushes Tesco Into Quarterly UK Fall

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Tesco, the world's third-biggest retailer, slipped back to an underlying sales decline at the lower end of expectations in the U.K. in the first quarter, raising doubts about a costly recovery plan for its home market.

The firm, which recorded a fall in profit for the first time in two decades in the year that ended Feb. 23, has spent 1 billion pounds ($1.5 billion) on a fightback plan for its British stores, where it makes about two thirds of revenue and profit.

But it said it had been hampered by weaker demand for its general merchandise products as it reorganizes that part of the business, and by the discovery across Europe of horsemeat in products labelled as beef.Tesco was one of several companies forced to withdraw some goods and apologize to customers.

The result at U.K. stores open over a year, excluding fuel and VAT sales tax, was a 1 percent fall in the 13 weeks to May 25.

That compares with analysts' forecasts of a fall of 0.5 to 1 percent, according to a Reuters poll, and a rise of 0.5 percent in the fourth quarter of the previous financial year, which was Tesco's strongest quarterly outcome in three years.

"Conditions outside the U.K. remain challenging and we have broadly maintained our performance from the fourth quarter of last year," said Chief Executive Phil Clarke.

"Whilst we are not expecting economic conditions to improve in the near term, we have a customer-focused plan for the year in each of our markets which takes this into account."

Britain's supermarkets, despite their focus on essential goods, have been hurt by the economic downturn and are battling for market share.

Tesco has been hit more than rivals, in part because it sells more discretionary goods like homewares and electricals where shoppers have been cutting back most.

Its U.K. turnaround plan has focused on more staff, refurbished stores, revamped food ranges and price initiatives - all aimed at reversing years of underinvestment and halting a loss of share to"big four" rivals as well as discounters like Aldi and upmarket player Waitrose.

"As expected, first quarter saw a slip to negative like-for-like sales growth in the UK," Panmure analyst Philip Dorgan said. "We don't view this as particularly important, although it is not especially helpful, given that a large chunk of the 'noise' is about short term trading trends."

Last month Britain's No. 4 grocer, Wm Morrison, posted a 1.8 percent fall in first quarter like-for-like sales, while No. 2 player, Wal-Mart's Asda reported a 1.3 percent rise, albeit for different trading periods.

No. 2, J Sainsbury, is scheduled to make a trading update on June 12. Tesco's problems are not confined to Britain. Like-for-like sales, ex fuel, fell 3.8 percent in Asia, hit by restrictions on trading hours in South Korea, its largest overseas market, and by a 5.5 percent drop in Europe, with central European economies impacted by fallout from recession in the euro zone.

In April the firm confirmed it would exit the United States. Tesco, which trailsWal-Mart and Carrefour in annual sales, said total first quarter sales increased 2.7 percent, excluding petrol.