Business Analysis: Can nothing stand in the way of the mighty Tesco juggernaut?

Supermarket giant heads towards £2bn profits, provoking concern about its dominance

Another strong Christmas for Tesco has put the supermarket behemoth firmly on track to become the first British retailer to break the elusive £2bn profit barrier when it unveils its annual results in three months.

Another strong Christmas for Tesco has put the supermarket behemoth firmly on track to become the first British retailer to break the elusive £2bn profit barrier when it unveils its annual results in three months.

Deliveries are supermarkets' specialities and yesterday Tesco's delivery was near perfect. The group, which takes almost one in three pounds spent in Britain's grocery stores, delivered like-for-like sales growth that outstripped all its rivals and topped City expectations.

Excluding petrol, which benefited from last year's high oil price, Tesco's underlying sales rose 7.6 per cent over the seven-week festive period. Despite last year's strenuous comparisons and greater deflation, like-for-like sales growth actually picked up across its 1,900 UK stores from the 7.5 per cent it delivered in the third quarter. And this during a Christmas branded the worst for a decade by the British Retail Consortium.

From music downloads to divorce kits, pet insurance to household mortgages, you name it and Tesco probably does it. The group already takes £1 in every £8 spent in Britain, but such is the grocer's confidence that it revealed this week that it was thinking of opening a chain of stores that don't even sell food.

Following Asda's lead, Tesco is planning to dip its toe in the ocean of non-food that makes up the rest of the high street by opening a dedicated non-food store to further exploit the power of its brand . Competitors should note that none other than a former Wal-Mart executive, Terry Price, helps run Tesco's burgeoning non-food business. Indeed, it is the likes of Florence and Fred, one of its clothing lines, and its cut-price electrical goods that are driving the group's top line: its non-food sales grew twice as fast as food sales over Christmas.

Andrew Higginson, Tesco's group finance director, said: "We've done a good job. Our team has done a great job. Some of it was down to us, some down to the market."

But this is Britain. Tesco is, after all, a UK retailer (it was started by a war veteran, Jack Cohen, from a market stall in 1919). Even the greatest of retailers can come unstuck, as the salutary lesson of Marks & Spencer has shown. Besides, Brits being Brits tend to get a little nervous at such runaway success. Not to mention aggrieved at the prospect of one company taking over the country's retail landscape.

So far, the only real hint of a backlash against Tesco has come from environmental pressure groups and those local residents who fear the arrival of the company's blue, white and red banner will spell bad news for local shopping choice.

There are signs, however, that this opposition is gaining strength. The National Federation of Women's Institutes recently added its voice to the growing chorus of disapproval from a group calling itself "Breaking the Armlock". Tap "Every Little Hurts" into Google and the play on Tesco's "Every Little Helps" slogan will yield a website aimed at protesting against the supermarket giant's increasing sway in local communities. Even the BBC got in on the act, asking readers via an online poll: "Is Tesco taking over?" yesterday.

For many, Tesco's unfettered march into the hitherto untouched jewel of food retailing - local convenience stores - was the last straw. Sandra Bell, at Friends of the Earth, hopes the Government will answer its calls and clamp down on supermarkets' growing dominance. "Many retailers are reeling from their worst Christmas trading for years, and it's now clear that their loss has been Tesco's gain," she said. She wants the Government to toughen its planning policy, introduce stronger protection for suppliers and "call a moratorium" on future takeovers in the sector.

Andrew Simms, at the New Economics Foundation, a left-of-centre think-tank, called Tesco's Christmas figures "the rise of a suffocating retail super-clone". He said: "Ignoring local campaigns against them, Tesco is shoving itself down the throats of consumers whether they like it or not. The danger of Tesco's rise is that it becomes a one-way street. Unless its voracious appetite is reined in, we risk becoming a one-supermarket state."

Ben Britz, a retail analyst at Morgan Stanley, cited the threat of a consequent consumer backlash as a possible threat to the group's continuing hegemony. "The only potential hindrance on the horizon is whether it comes up against a PR challenge such as that which Wal-Mart is facing in the US," he said. "If Tesco is seen to be raising margins too far or fast there is a danger of negative publicity from consumer circles." Wal-Mart, which owns Asda, was forced last week to launch a newspaper campaign in an attempt to persuade customers that it is not all bad.

One town has already fallen firmly out of love with Tesco. The residents of Gerrards Cross, the prosperous commuter town in Buckinghamshire, have vowed to boycott Tesco after losing a campaign to stop it building a superstore smack bang in the middle of the town.

No one in the area wants the store, from the South Bucks district council downwards, but Tesco is undeterred. It had to lobby John Prescott, the Deputy Prime Minister, to get the go-ahead for the an ambitious civil engineering project that will see it fill in a railway cutting to create the space to ram a 3,400sq metre store into an already crowded high street.

Residents are afraid of the traffic; shopkeepers are worried about going out of business. A popular greengrocer, DH Aldridge, has already bowed out, unable to face the "humiliation" of competing against a company with annual sales of £33.5bn. A vociferous campaign against the store met with semi-success this month after Tesco withdrew an additional application to increase the store's size by one-third. One protester said: "It's already overwhelmingly big. It will be a total disaster for the town and the traffic."

Although the City was yesterday as quick as ever to laud the retailing prowess of Sir Terry Leahy, Tesco's highly regarded chief executive, analysts detected an extra hint of caution from the group. For starters, it "only" guided the market to expect it to meet current pre-tax profit forecasts of £2.027bn. This in itself prompted the shares, which have doubled over the past two years, to fall 9.5p to 313.75p. It also highlighted "tough trading conditions" in some of its markets in Central Europe.

Given UK retailers' lacklustre track record overseas, analysts caution that Tesco's growing international business could trip it up one day. It has outfits in 13 countries outside Britain, from China to Slovakia.

Tesco also has to contend with the prospect of greater competition in the UK this year. Wm Morrison and J Sainsbury are desperately striving to get back on the front foot and Asda's parent, Wal-Mart, will be anxious to kickstart its UK charge's stalling sales growth. Deflation over the Christmas period more than tripled, reflecting how hard Tesco is having to work to remain competitive.

But whether any of this will actually knock Tesco off its retailing pedestal is a moot point. As Andrew Kasoulis, of Credit Suisse First Boston, says: "Tesco has the advantage of being all things to all men. Their market share is theirs to lose rather than others to gain."