Tesco issued a profit warning on Thursday after reporting one of its worst Christmas trading periods ever. The company's shares slumped by 15% following the announcement.
"In a challenging economic environment, we made good progress internationally but despite record sales, we are disappointed with our seasonal trading performance in the UK," Philip Clarke, the company's chief executive said in a press release.
Like-for-like group sales in the six weeks to 7 January, excluding value added tax (VAT), new store openings were down 2.3% on the previous year - particularly disappointing given that 2010 sales were hit by severe weather. Analysts polled by Reuters had been expecting a decline of less than 1%.
The company introduced a major price-cutting initiative - the "Big Price Drop" in the summer in an attempt to revive flagging sales in the face of a consumer slowdown. However, its competitors responded with price matching and coupon offerings.
While the Big Price Drop did deliver additional volume, it did not offset the hit on Tesco's margins, however, Clarke said that he believes it, and other investments in the chain's stores, will deliver more value in the future.
"We delivered a very good Christmas shopping experience for our customers but in a highly promotional market, the volume response to our increased investment into lowering prices did not offset the deflation it has driven," he said. "The wider improvements in the shopping trip that are an integral part of strengthening our performance are still to work through fully."
Broker Panmure Gordon downgraded its 2013 and 2014 profit forecasts for Tesco by 15%, warning that the weakness of the UK business threatens to dent the company's overseas ambitions.
"Ultimately, if the UK’s profits keep falling, then [Tesco] will not be able to invest as much overseas, so long term growth will slow and returns will significantly undershoot targets. This is the nightmare scenario," Panmure Gordon analysts said in a research note.
Sainsbury's, one of Tesco's largest domestic rivals, reported its "best Christmas ever" on Wednesday, with like-for-like sales up more than 2%, beating a general gloom in the retail sector that has seen a number of companies enter, or flirt with, administration.
Home Retail, which operates Argos, said that it had seen an 8.8% drop in underlying sales, while Halfords and Mothercare also issued disappointing figures on Thursday.
The British Retail Consortium reported higher sales growth in the Christmas period than expected - 2.2% - on Tuesday, but added that it had been driven by aggressive discounting, suggesting that margins will be squeezed and there is more pain to come for retailers.