Tesco recovery gains pace with fastest sales growth in 3 years

By James Davey

LONDON (Reuters) - Tesco's sales are rising at the fastest pace for three years, industry data showed on Tuesday, signalling the recovery at Britain's biggest supermarket group is gathering pace.

Shares in the company climbed as much as 4 percent after market researcher Kantar Worldpanel said Tesco's sales grew by 2.2 percent year-on-year in the 12 weeks to Nov. 6, boosting its share of Britain's grocery market to 28.2 percent from 27.9 percent this time last year.

The stock has risen 43 percent so far this year, with the firm reporting three straight quarters of underlying sales growth in its main British market. Last month's Kantar report also showed Tesco growing its UK market share for the first time in five years.

In October, Tesco set tougher profitability targets too.

"Tesco's continued sales acceleration and it winning market share is the key feature this month, despite it having a declining share of retail space," said HSBC analyst David McCarthy, who on Monday upgraded his stance on Tesco to "buy".

Kantar highlighted that most of Tesco's gains came from its own-label products, both its cheaper "Farm Brands", launched in March to encourage shoppers to return from discounters Aldi and Lidl, and its more upmarket "Finest" range. It also noted more affluent shoppers returning to Tesco.

While Tesco's momentum continues to build, Aldi and Lidl saw their sales growth fall to the slowest rate since 2011, up 10.2 percent and up 6.1 percent respectively, Kantar said.

But Kantar noted the discounters are still attracting new shoppers, helped by continuing store openings.

Britain's other major supermarkets - Sainsbury's, Asda and Morrisons - saw sales declines of 0.7 percent, 5.0 percent and 2.4 percent respectively, though Morrisons' fall reflected the closure of some stores.

Overall, UK grocery sales increased 0.8 percent in the 12-week period.

DEFLATION CONTRACTS

Kantar also said deflation in Britain's supermarket sector weakened to 0.5 percent in the 12 weeks to Nov. 6 and predicted that after more than two years of deflation prices could start to rise in the coming months.

"We’re likely to see prices starting to creep up again in December, unless retailers choose Christmas to unleash a new round of price cuts," said Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel.

"Although it's tempting to link any potential price increases to Brexit and the devaluation of sterling, it's worth remembering that deflation has been easing since December last year, well before the (June) referendum."

Official data published on Tuesday showed UK consumer prices rose 0.9 percent in October compared with a year ago.

Market share and sales (percent)

12 wks to 12 wks to pct change

Nov. 6 2016 Nov 8 2015 in sales

Tesco 28.2 27.9 2.2

Sainsbury's 16.3 16.6 -0.7

Asda 15.5 16.4 -5.0

Morrisons 10.5 10.8 -2.4

Co-operative 6.4 6.3 2.2

Aldi 6.1 5.6 10.2

Waitrose 5.3 5.2 3.0

Lidl 4.6 4.4 6.1

Iceland 2.1 1.9 8.3

(Editing by Kate Holton and Mark Potter)