Unwanted gifts spoil Tesco's Christmas

By Paul Sandle

LONDON (Reuters) - Tesco's Christmas trading missed forecasts as strong food sales were offset by weak demand for items such as DVDs and computer games, showing that even Britain's biggest supermarket chain is feeling the strain as consumers curb their spending.

Market research this week had identified Tesco as a festive winner, but the group said lower sales of general merchandise and the collapse of a tobacco supplier cast a shadow over a record week of trading before Dec. 25.

Britons, whose spending power has been squeezed by inflation, prioritised food this Christmas and cut back on nearly everything else, industry data has shown.

Tesco Chief Executive Dave Lewis agreed that shoppers were tightening their belts, echoing comments from rival Sainsbury's on Wednesday.

"There is definitely some caution in the way customers are talking about the year ahead," Lewis said. But there were signs that higher inflation was "abating a little".

Tesco, which has a 28 percent share of the British grocery market, reported a 1.9 percent rise in like-for-like revenue in the six weeks to Jan. 6.

However, analysts had expected a rise of between 2.4 and 3.2 percent.

Sainsbury's, Britain's second largest supermarket group, and fourth-ranked Morrisons, both this week beat forecasts for Christmas trading.

Shares in Tesco were trading down 4.2 percent at 1250 GMT, the second worst performer after Marks & Spencer, the high street retailer which reported a fall in like-for-like Christmas sales on Thursday.

FOOD, GLORIOUS FOOD

Lewis said food, and particularly fresh food, were driving growth across all the company's stores and online, with the company selling over 600,000 turkeys and half a million kilos of fresh salmon.

"In the Christmas week itself (...) we sold more food than ever before at Tesco as we made our offer the most competitive it's been for many, many years," he told reporters.

Lewis's strategy to rebuild Tesco following an accounting scandal in 2014 has been based on increasing food sales.

Tesco has tightened its hold on the nation's food market after the competition regulator last month cleared its 3.7 billion pound ($4.95 billion) takeover of wholesaler Booker.

Lewis is scaling back in general merchandise areas such as entertainment, where customers are turning to digital alternatives, while focusing on categories like clothing.

However, competition is intense in the food market, driven by German discount chains Aldi and Lidl, which increased total sales by 15 percent and 16 percent respectively over Christmas.

Lewis said Tesco had passed on fewer price rises than the "big four", which also includes Wal-Mart owned Asda, and discounters Aldi and Lidl in the year to date.

Food sales grew by 3.4 percent, and fresh food specifically by 3.7 percent in the six weeks before Christmas, Lewis said, but weaker sales in general merchandise were a 0.6 percent drag and the disruption in tobacco supplies took a 0.5 percent toll.

Lewis said the collapse of the Palmer & Harvey tobacco supplier had taken "the shine off an otherwise outstanding performance for the period as a whole".

Tesco had to rebuild its supply chain for tobacco and some other products for its smaller stores in the middle of its peak trading period because of the failure.

Broker Bernstein said Tesco's like-for-like food numbers were "very strong", but its Christmas overall could disappoint due to tobacco and general merchandise.

(Editing by Keith Weir)