Try not to worry he will learn it, every child is different and they all learn differently.
I would go back to just looking at letters, try some letter games, flash cards as he may not be ready to blend words. Jocies ideas are good. Making a abc book with him, decorate each letter with a different texture which will be fun to do and he can go over each letter with his hands, great kinaesthetic learning.
Once he knows the letter sounds of the alphabet I would start with some simple books. Rhyming ones are great usbourne do a great selection.
The only way to learn words like 'the' is by sight make some flashcards with him, get him to choose his favourite colour for the cards, get him to watch you write the words. When he is older the school will hopefully teach him how to decode word or ways to remember these tricky words.
With his school reading books I would read it to him first with your finger under the word you are reading. Plus keep the book for a week repetition is important for this age. There is no rush to have a new book or go up a level as you want ur child to retain what he is learning and to have fun!
Find out how they teach phonics in his class and reinforce it at home, consistency does pay off.
Hope this helps