Company in the news: Tesco

Supermarket giant Tesco's (LSE: TSCO) first-quarter trading update was very disappointing. Despite throwing lots of money at its British business, like-for-like sales (that is, sales adjusted for new space) fell by 1%. This makes the recent uptick in Christmas sales look like it might have been a blip. Tesco is clearly struggling to win back customers who have gone elsewhere.

The main problem in Britain is weak sales of non-food items. This could become a very big headache for the company. Tesco built lots of massive hypermarkets on out-of-town retail parks, designed to sell clothes and gadgets on a pile-'em-high, sell-'em-cheap' basis. But these now look totally unsuited to current shopping habits. Cash-strapped consumers are avoiding buying things they don't need with money they haven't got.

Worse still, when they do buy these sorts of items, they tend to go online to do so. Just as supermarkets helped to contribute to the decline of local shops, so the likes of Amazon have taken that business from the supermarkets. Online retailers can offer a far wider range of products and the convenience of home deliverywithout having to trek to a grim retail park off a motorway somewhere. So even when and if the British economy recovers, these stores may never deliver on their original promise for Tesco.

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That's a real issue. These big stores cost an awful lot to run and could be a drag on profits for years to come. It's difficult to see how Tesco can fix this problem without experiencing a lot of pain after all, it's hard to see who else would want to buy them.

Sales in Asia and central Europe were also weak. It looks as if City analysts may have to start cutting their profit forecasts for Tesco if things don't pick up. Investing in supermarkets in general looks very unappealing just now. There are too many shops chasing too few shoppers. We'd certainly continue to avoid Tesco shares.

Verdict: avoid