Tesco hit by drop in non-food sales

The bellwether company, which gathers more information about the state of the British economy than perhaps any organisation except the Bank of England, warned that spending on nonfood items is slipping.

The supermarket chain's sales figures remain healthy, and could even improve overall if wealthier shoppers abandon more upmarket rivals such as Waitrose in search of bargains. But the warning on sales of things other than food will be read with unease in the City and elsewhere.

Chief executive Sir Terry Leahy said there is a "more cautious mood" in recent weeks, with sales of big-ticket items such as furniture on the slide.

A trading update for the first quarter of the year revealed that like-for-like sales in UK stores rose by 3.5%. This is at the lower end of analysts' expectations, and much lower than Wm Morrison managed recently. It is also skewed somewhat - Tesco won't say how much - by inflation, which is rapidly forcing up the cost of staples such as bread.

Finance director Andy Higginson said: "Everyone is aware that the consumer is hard-pressed. Everyone is feeling the pinch, but customers are prepared to spend where they see value. We have set the business up on the basis that it is going to be a tough year."

Higginson also claimed the improved performance of rivals was temporary. "I think Asda and the discounters are having a moment in the sun with the importance of price. They're singleclub golfers," he said.

This quarter is the first time sales of non-food items have grown more slowly than those of food since Tesco moved away frombeing solely a grocer.

Sales outside the UK were up 13.9% as Tesco continued to expand rapidly. It is yet to offer specifics on the performance of US venture Fresh & Easy, beyond denying analysts' suggestions it has been ill thought-out.

Defying the convention that supermarket shares are a good defensive bet when the economy slides, Tesco stock is off 16% this year. The shares today slid another 10p to 392p. But Tesco is still valued at more than £32 billion, and has a 30% slice of the UK grocery market.

Analysts say Tesco will use the consumer slowdown as an opportunity to build market share further. By slashing prices on thousands of items, it hopes to attract custom from Sainsbury's and Asda, and keep them when the economy begins to improve. It has been outspoken on the need for interest rate cuts, and has attacked the Bank of England for not moving quickly enough.

Tesco is thought to be close to agreeing a deal to buy the 50% of Tesco Personal Finance that it does not already own from joint-venture partner Royal Bank of Scotland. It is expected to cost a £1 billion and could be confirmed soon. Higginson declined to comment.

The joint venture was set up 11 years ago, and has grown to boast more than five million accounts. Its most recent figures, for 2006, show a profit of £130 million.