By James Davey and Kate Holton
LONDON (Reuters) - A new drive to cut food prices boosted Tesco's quarterly sales, turning up the heat on rivals three years after Britain's biggest retailer started work on a turnaround plan.
Shares in Tesco (TSCO.L) rose as much as 3 percent on Friday after the group also said it was delighted with initial progress at wholesaler Booker, which it acquired in March, and was on track to deliver its medium-term financial targets.
The group's robust update contrasted with the problems of Britain's wider retail sector, which has seen a raft of failures this year.
Forced to rebuild after a 2014 accounting scandal capped a dramatic downturn in trading, Tesco said a move to lower prices on fresh food, such as minced beef and potatoes, towards the end of its first quarter reflected a growing confidence in its performance.
"It's about us continuing to invest in the offer," Chief Executive Dave Lewis told reporters, noting that prices in core lines had already been lowered by 6-7 percent over the previous three years.
The strong performance is timely as Tesco faces increased competition in a sector already reshaped by inroads made by German-owned discounters Aldi and Lidl.
Accustomed to being the biggest beast in the industry, Sainsbury's proposed 7.3 billion pound ($9.7 billion) takeover of Walmart's Asda would push Tesco down into second place.
Looking at the broader retail industry, Lewis said he was pressing the government to be more supportive, particularly as regards a relaxation of business rates - property taxes for businesses.
The lower prices, plus a relaunch of own-brand products, helped Tesco to counter bad weather in March and deliver underlying sales growth in its home market of 2.1 percent in its first quarter to May 26. That was at the top end of analysts' forecasts and a 10th consecutive quarter of growth.
"To have slowed down only slightly from (2.3 percent in the previous quarter) is a good achievement given lower levels of inflation in the market, tougher (comparatives) and generally unhelpful weather in the quarter," said analysts at Barclays who have an "overweight" stance on the stock.
(Graphic: Tesco share performance - https://reut.rs/2Mqkr6y)
SILENT ON SAINSBURY'S/ASDA
The rise of Aldi and Lidl and the growing popularity of online sales has forced traditional groups Tesco, Sainsbury's (SBRY.L), Walmart's (WMT.N) Asda and Morrisons (MRW.L) to rethink their strategies.
Lewis's boldest move was to buy Booker for 4 billion pounds ($5.3 billion) to expand into supplying restaurants, cafes and local shops.
Tesco currently dominates Britain's supermarket sector by a clear margin, with a 27.7 percent market share, according to industry data. However, a Sainsbury's/Asda combination would top that.
Lewis declined to comment on the takeover, merely stating that Tesco would submit its views to the competition regulator in due course.
Booker's like-for-like sales rose 14.3 percent, including tobacco, partly reflecting new business wins.
As a group, underlying sales growth was 1.8 percent, its strongest quarterly performance since 2011.
"Our growth plans are on track and we are pleased with the momentum in the business," said Lewis.
Tesco's trading update was published ahead of its annual shareholders' meeting, where Lewis, CEO since 2014, could face some flak over his near 5 million pounds 2017-18 pay package, labelled "excessive" by shareholder advisory group Pirc.
Lewis also warned of the pressure on the industry.
Already this year Toys R Us UK, Maplin, Conviviality and Poundworld have collapsed, while Marks & Spencer, New Look, Carpetright, Mothercare and House of Fraser are closing stores.
Lewis had warned in a speech to business leaders three years ago that the government's approach on business rates, the minimum wage and apprenticeship levy was a potential "lethal cocktail" for the industry.
"Unfortunately three years on we start to see the impact of that," he said on Friday.
"Constantly looking for the amount of money that's coming out of bricks and mortar is not sustainable long term and we look for the government to think about that."
(Editing by Guy Faulconbridge/Keith Weir)