Tuesday's trading update from Tesco interim management statement revealed UK like-for-likes had slowed but that the exodus of customers has been arrested. However, the trading down within the product offer will be affecting not only the cash gross profit pool but also the margin percentage. Costs are tightly held but we continue to believe UK profitability will be pressurised into 2009. Its rhetoric on debt is sensible but Tesco is not the flavour of the month right now. Is it doing everything right or is the crown slipping?

The stock market whispers were right: Tesco's like-for-likes did slow in Q3, and some observers were expecting even worse than the 2% delivered. Inflation is ceasing to be a major factor in food retail like-for-likes and Tesco states that the introduction of the "discounter" ranges in-store has sharpened up the price perception. Price had, for the first time in a while, become one of the reasons that customers were defecting from the market leader, and the new brands are helping.

Tesco believes it has become 3% more competitive of late. But the read through from this is that the gross profits pool is falling. Slow top-line growth at a lower gross margin means Tesco will have to work very hard on costs to ensure UK operating margin is even held this year. Any further drifting away of like-for-like form (and inflation could soon turn into deflation) could mean UK growth forecasts are too optimistic. And it is not as though life overseas is any easier. Sales were up nicely in Asia and it appears that the acquisition of Homever is bedding in nicely.

However, things are less rosy in Europe: the Irish economy is struggling (Tesco is glad it doesn't sell non-food there) and the continued woes in Hungary and the Czech Republic have affected Tesco there also. The political and economic uncertainties in Turkey have meant that growth there has been difficult to come by. It comes as little surprise that Tesco is choking back on its US expansion given how difficult that economy is, too. Debt may not quite meet the previously set £8bn target, but capex is being cut back, mostly in the UK: we now assume £3.5bn of expenditure for 2009/10.

Tesco is a good business but at the moment the momentum in the sector is elsewhere and we are not convinced the "discounter" range is the answer to its domestic woes. It will bounce back but Oriel would rather own other shares just now.

Jonathan Pritchard is a partner at Oriel Securities.