London: Tesco issued its first profit warning in living memory on Thursday, sending shares in grocers tumbling on fears the world's third-biggest retailer would launch a price war to fight back from its worst Christmas in decades.
The warning, which prompted the biggest one-day fall in Tesco shares since 1988, raised the spectre of a drop in profitability for the industry as a whole and threatens the cash engine that drives the company's overseas expansion.
Chief executive Phil Clarke said operating profit in 2012/13 would be flat, compared with forecasts for a 10 percent rise, as Tesco, previously one of corporate Britain's most consistent growth stories, invested hundreds of millions of pounds in fixing what he described as "long-standing" problems in its home market.
"We've driven productivity a bit too hard is the truth. We've run too hot for too long, and that's affecting most aspects of our shopping trip, and that's got to get better," he said.
Tesco will invest in staff and better products as well as continuing a price-cutting campaign launched in September. It will cut back openings of big hypermarkets, the key to its conquest of Britain's retail sector in the 1990s, and focus on faster-growing smaller stores and the Internet, he said.
"This is the first time that Tesco is deliberately taking profit margins lower that we can remember ... with the likely outcome a reduction in industry profitability," Espirito Santo analyst Caroline Gulliver said.
Shares in Tesco plunged as much as 16 percent to a 33-month low of 324.25 pence, wiping 4.8 billion pounds off its stock market value. Rivals J Sainsbury and Wm Morrison also fell over 5 percent.
Analysts welcomed the drive to improve Tesco's British performance, which started to falter in the last years of long-standing chief executive Terry Leahy and has continued to lag its main competitors since Clarke took over in March 2011.
Panmure's Philip Dorgan said the stakes could not be higher, as weakness in Britain could undermine Tesco's expansion in faster-growing markets such as China and eastern Europe.
"This is the nightmare scenario," he said, slashing his pretax profit forecasts by 15 percent for 2012-13 and 2013-14.
"If the UK's profits keep falling, then it will not be able to invest so much overseas, so long-term growth will slow and returns will significantly undershoot targets."
Tesco's warning was accompanied by a raft of weak trading updates from British store groups including Home Retail-owned Argos, bicycles-to-carparts group Halfords and Mothercare, underscoring how cash-strapped Britons have been cutting back spending on non-essentials.
A surprise slump in November industrial output also raised fears the British economy shrank last quarter.
Disposable incomes across much of Europe are being squeezed by rising prices, muted wages growth and government austerity measures, with consumers also worried about the fallout from the euro zone sovereign debt crisis.
Belgian grocer Delhaize said on Thursday it was axing 5,000 jobs after fourth-quarter sales fell just short of forecasts in its key U.S. and Belgian markets.
Tesco, which accounts for about one in every 10 pounds spent in British shops and makes over 70 percent of trading profit in its home market, said sales at British shops open over a year dropped 2.3 percent, excluding fuel and VAT sales tax, in the six weeks to January 7. A 0.9 percent fall had been forecast.
"It is not what I wanted for Christmas," Clarke said.
Not getting better
Tesco's problems were partly due to the pressure on British shoppers, he told reporters on a conference call.
The group sells a higher proportion of discretionary non-food goods such as clothing and electrical items than rivals such as Morrison and Sainsbury, both of which reported small rises in underlying Christmas sales.
"It is going to be broadly the same (as in 2011). I cannot see it being any better," Clarke said of the consumer outlook.
Some of Tesco's disappointing sales performance was also due to its "Big Price Drop" campaign in September, he added. While this attracted extra customers, it had not yet tempted enough to offset the drop in takings.
Tesco also suffered from promotions and couponing by rivals, Clarke said, questioning whether some of them would see much benefit to profit from rising sales.
The British Retail Consortium had said on Tuesday that retail sales rose a better-than-expected 2.2 percent in December, partly due to heavy discounting.
Tesco, which lags only French group Carrefour and US industry leader Wal-Mart by annual sales, said group sales rose 5.2 percent, helped by growth in Asia, eastern Europe and the United States. Carrefour and German retailer Metro, which have both warned on profit in recent months, report fourth-quarter sales next week.
Tesco, with over 5,300 stores in 14 countries, said on Tuesday it was mothballing 12 stores at its loss-making Fresh & Easy business in the United States due to weak local economies, adding it remained committed to the chain.