Tesco raised its annual profit forecast today after posting a jump in half-year earnings as its Clubcard Prices promotion and price match scheme helped it retain shoppers in the face of intense competition from the discounters.
The supermarket said it now expects 2023/24 retail adjusted operating profit to be between £2.6bn and £2.7bn, up from earlier guidance of about £2.5bn. This follows a forecast-beating 13.5% rise to £1.42bn during the six months to 26 August after robust growth in its key markets helped lift total retail sales by 8.2% to £30.1bn.
Like-for-like sales in the UK grew by 8.7%, with Tesco stating that it had seen strong performance across all formats and channels. The group noted that price inflation fell gradually across the half as input cost inflation pressures eased. Volumes and sales mix performance was said to have improved into the second quarter, but sales growth fell back slightly in the second quarter as it traded over a period of warm weather and the Platinum Jubilee celebrations in the prior year.
Tesco highlighted that by the end of the first half, around 2,500 products were, on average, 12% cheaper than at the start of the year. “We have market-leading capabilities in commodity forecasting and purchasing, which allows us to work in close partnership with our supplier partners to be first to market with the best prices possible for customers,” it said.
Tesco also noted that its food sales were particularly strong, growing by 10.6%, as it benefitted from improvements in its product range. It launched 335 new products in the first half and reformulated 1,150 own-label lines.
At Booker, like-for-like sales grew 7.5%, with growth across both its retail (+6.0%) and catering (9.1%) units, despite a “challenging trading environment”.
In Ireland, total sales grew by 10.0%, boosted by the nine Joyce’s stores Tesco acquired in June last year. Like-for-like sales in the country grew by 6.9% during the half, with the retailer noting that it had seen a return to volume growth in the second quarter.
In Central Europe, like-for-like sales grew by just 0.9%. Tesco blamed the weak performance on the impact of government stimulus in Hungary being scaled back and a general volume contraction in the market due to inflationary pressures.
Commenting on the results, Chief Executive Ken Murphy said Tesco was doing “everything we can to drive down food bills” and it was “the most competitive we’ve ever been”.
He added: “We’ve seen inflation come down progressively over the last six months, which gives you a clear indication that our suppliers are working closely with us to try to drive down costs. And where you’re seeing some of the more extreme cost increases over the last 18 months, we’re starting to see costs come down.”
Whilst he expects inflation to continue to ease in the second half of the year, Murphy warned that higher wages and oil prices were “probably here for the medium term”, so it was difficult to predict if grocery bills would ever go back to 2020 levels.
However, he said customers were becoming more optimistic about the future, with worries over mortgage rates and grocery bills starting to ease. “I’m sure that it will be still challenging for a number of families. But overall, we think the customer is in good shape for this Christmas.”
Shares in Tesco, which are already up 16% this year, rose over 3% this morning, with William Woods, a retail analyst at AllianceBernstein, saying that Tesco’s strong results “should be received positively given the concerns around sector profitability amid fears of deflation, which we don’t think is a material risk”.
Richard Lim, CEO at Retail Economics, added: “These results are mightily impressive. Their relentless focus on value has delivered strong growth, while the significant bounceback in profitability will be a cause of attention.
“Many shoppers are prioritising cost above everything else, trading down to cheaper alternatives and searching out the best bargains. This is where Clubcard prices have delivered incredibly well with a hugely impressive number of customers using the app. But as consumers decide to cut back the number of meals out and on takeaways, the retailer has also benefitted with a trend towards dining-in, catered for by their premium ranges.”
NAM Implications:
- Highlights have to be inflation-beating sales increases improving the bottom line.
- And the undoubted success of Clubcard promotions.
- With the added benefit of consumers switching from ‘eating out’ to eating ‘better’ at home.
- The issue has to be to what extent Tesco’s price-cut initiatives will be blunted…
- …by similar moves by rivals…
- …especially by the discounters.
- Meanwhile, taking these results as read…
- …suppliers should check the extent to which they have achieved their fair share of sales and investment.
