Ratings firm issues Tesco warning

Under-pressure supermarket Tesco was dealt a further blow today as a key ratings agency placed the retailer on negative outlook due to lower profits and a weakening hold on the UK market.

The embattled grocer has endured one of the most challenging periods in its history after it issued its first profit warning in 20 years.

Standard & Poor’s said ongoing pressure from intensifying competition, weak consumer spending and lower profits could trigger a downgrade to its risk profile and credit rating.

The agency also warned that chief executive Philip Clarke’s £1bn plan to invest in improving customer service in its UK stores will negatively affect its trading margins.

A downgrade would make it more costly for the retailer to fund any expansion or turnaround plans in the future and make it harder for the supermarket to keep prices low for customers.

A statement from S&P said: “Tesco’s operating performance will likely continue to be dampened by sluggish household spending in the UK as a result of nominal wage growth, a fragile labour and housing market, and high household debt burden.”

Investors held their nerve in the wake of the warning as shares were broadly flat at 318p.

The stock has plunged 23% since the profit warning at the start of the year, as its market share has been chipped away by cheaper rivals such as Aldi and Lidl.

Tesco admitted that its £500m Big Price Drop launched last year failed to impress customers but has revamped the initiative to focus more on giving customers special offers and money-off coupons.

Mr Clarke also unveiled plans to spend £200m on extra staff and improving levels of service after a trial in 200 stores delivered a 1.1% sales boost.

Other improvements have included a “complete relaunch” of the Tesco own-brand ranges and a £150m investment in its website to allow it to better compete with online specialists such as Amazon.

It will add a further 700 click-and-collect pick-up points to its stores over the next year, almost doubling the number available.

Despite the turnaround programme, the group’s recent sales figures lagged behind that of smaller rival Sainsbury’s.

It suffered a 1.5% fall in underlying sales in the 13 weeks to May 26, while Sainsbury’s recorded a 1.4% underlying sales rise.