Tesco announces strategy change as it records worst UK sales in 20 years

Nearly 16 per cent was wiped off the market capitalisation of Tesco yesterday after it stunned the City with an almost unprecedented profit warning and its worst UK sales for two decades.

Analysts took an axe to forecasts and warned of an "inflection point" for the grocery industry, as Tesco said its operating profits would be at the bottom end of City forecasts this financial year, with "minimal" growth next year.

On a momentous day, the world's third-largest retailer described its UK performance over Christmas as "disappointing" and admitted it had made mistakes communicating its £500m Big Price Drop campaign and by not issuing enough coupons during the festive period. The grocer also unveiled historic changes in its strategy to focus on opening smaller stores, as opposed to its big monolithic hypermarkets.

Shares in Tesco plummeted by 61.6p, or 16 per cent, to 323.5p yesterday. Morrisons and Sainsbury's, whose shares fell by 5 per cent and 6 per cent respectively, were also badly buffeted, as investors fretted over growth prospects and lower margins for the sector.

Philip Clarke, the chief executive of Tesco, admitted it was the worst UK underlying sales at the grocer for "two decades". While Tesco has 13 operations in countries overseas, including Poland, China and South Korea, the UK still represents more than two-thirds of group operating profit.

The grocer's underlying UK sales, excluding fuel and VAT, tumbled by 2.3 per cent over the six weeks to 7 January, which was worse than City forecasts. This compares with 1.2 per cent growth at rival Sainsbury's and Morrisons' 0.7 per cent rise in sales.

But it was Tesco's comments on "minimal" growth in trading profits in 2012-13 that City analysts seized upon. Dave McCarthy, an analyst at Evolution Securities, said the group's trading profit is set to be downgraded by between 8 per cent and 10 per cent – with much of it in the UK. The grocer is also cutting back on its capital expenditure in the UK and reducing its opening programme.

Mr McCarthy said: "Tesco is cutting back on the amount of new space devoted to non-food and will no longer be opening large, 100,000-square-foot stores." The grocer will now focus on convenience stores and supermarkets, sized between 40,000 sq ft and 60,000 sq ft. In an effort to improve its shops, Tesco has already rolled out a trial in 15 UK stores to about 200 six weeks ago. Mr Clarke said: "It is on price, quality, range and service – a broad-based series of plans to see the customer experience gets better."

Tesco's total UK sales, excluding fuel, rose by 1.7 per cent. Revenues rose by 4 per cent at the group level, driven by strong sales in Asia and the US. Mr Clarke said: "The story that everyone wants is disaster everywhere, but Asia and America were not."