Opinion was divided in the City when Tesco revealed its third-quarter update last week.

Opinion was divided in the City when Tesco revealed its third-quarter update last week.

Tesco’s like-for-likes in the UK, excluding petrol and VAT, fell 0.9%, but onlookers were keen to see what effect the grocery giant’s Big Price Drop has had on volumes so far.

The UK’s biggest retailer reported that 10 weeks after launching “this fundamental, long-term shift in pricing and promotional strategy”, early results were promising.

Broker Evolution does not agree. In a note, analyst Dave McCarthy labelled the update “disappointing” and his read through for the other big supermarkets is bearish.

He said that “2012 could be a disaster for the industry”, arguing that if volumes continue to weaken and inflation falls back, “the sector could face an unprecedented situation of flat or falling sales”.

If this happens, said McCarthy, investors should be prepared for severe profit warnings.

The grocers have had it good for a long time. While their general merchandise peers suffered in the face of falling confidence that led shoppers to shelve purchases of plasma TVs and new winter coats, consumers continued to stock up on their food staples.

It would be hard to imagine the end of the grocers’ run of rising profits and sales. Tesco’s third-quarter performance was hardly sparkling, but it argues that its Big Price Drop was the right thing to do in the tough trading conditions.

Some analysts disagree with McCarthy’s robust stance, arguing that Tesco volumes have increased, and that there could be more growth to come.

Encouragingly, Tesco chief executive Philip Clarke has acknowledged the grocer cannot rely on pricing alone, and has said the retailer will continue to focus on improving service, ranges, and stores too. Another positive is Tesco’s overseas performance, which remains encouraging.

Whatever the outcome of the Big Price Drop and the fierce competition in the food sector, it would be a brave person to bet against Tesco.