Tesco raised its annual profit forecast today after half-year results confirmed that it had gained market share over the summer months as shoppers responded positively to the investment in its pricing and product offer. The UK’s leading grocer noted this gave it momentum heading into the festive trading period, although it expects to face tough price competition as stores battle to attract cash-strapped shoppers.
Back in April, Tesco forecast that its profit would fall in its 2025/26 financial year as it set aside cash to deal with a step-up in “competitive intensity” – a reference to a pledge of sustained price cuts from Asda in an effort to win back market share. However, the group’s strategy of price-matching Aldi on hundreds of key items, together with its Clubcard Prices promotion, has helped it maintain its momentum and see off competition from its rivals.
Tesco said today that it now expected to make annual profits of up to £3.1bn, up from a previous maximum of £3bn. The group noted that efforts to cut the price of 6,500 items by an average 9% had “worked better” than it predicted and that the rate of inflation in its stores was “well behind” the latest headline rate for groceries of 4.9% (Worldpanel).
Referring to comments made earlier this year by Asda’s Chairman Allan Leighton that the struggling grocer would invest “a pretty significant war chest” in cutting prices, Ken Murphy, Tesco’s Chief Executive, said: “Some of our competitors went pretty strong on their statement of intent at the start of the year and have acted on that. It doesn’t feel that rational. We have invested in price to maintain our momentum, and we are anticipating the second half could be more intensive, not less.”
Murphy stated that Tesco was optimistic about Christmas trading as it would be “pulsing in strong deals” over the next three months. However, he noted that some shoppers were nervous about spending before the Budget in November: “They are concerned and worried about the Budget and the economic outlook … Competitive intensity remains high, and with continued pressure on household budgets, we remain committed to ensuring customers get the best possible value by shopping at Tesco.”
Over the six months to 23rd August, Tesco’s group adjusted operating profit increased 1.5% to £1.67bn on sales up 5.1% to £33.05bn. However, pre-tax profits slipped by 6.3% to £1.31bn due to restructuring costs and the separation of the group’s banking division.
Tesco revealed that it was focused on efficiency savings to offset additional costs from new government measures, including higher employer national insurance contributions, which cost it £235m, and the new EPR packaging levy, which will amount to £90m this year. The firm is also using AI to better estimate demand and cut waste, as well as “optimise” staff hours in stores.
Speaking this morning, Murphy warned the Chancellor Rachel Reeves that “enough was enough” in additional taxes and regulatory costs for businesses after last year’s damaging Budget. He called on the government to exclude all retailers from planned higher business rates for larger premises and deliver a “pro-growth and pro-jobs” budget on 26th November.
In the UK, Tesco’s like-for-like sales grew 4.9%, with growth across its large store, convenience and online channels. The company noted that its overall brand perception had outperformed the market, with year-on-year growth in satisfaction (+263bps) and value (+89bps), and a further improvement in quality (+13bps).
Food like-for-like sales in its domestic market rose by 5.7%, with a “strong volume performance” from fresh food, driven by “ongoing range development, focused on product quality and innovation”. Tesco launched over 470 new products and improved a further 560 during the period. Its Finest range also continued to perform well, with sales up 16% year-on-year.
Large store like-for-like sales grew by 4.5%, while convenience like-for-like sales, which include sales from its One Stop chain, increased by 1.4%. Within this, Tesco Express like-for-like sales were up 1.8%, including “strong performance” in fresh food volumes. Online sales rose by 11.4%, driven primarily by volume growth, including a 2ppts contribution from its Whoosh rapid delivery service.
In the Republic of Ireland, Tesco’s like-for-like sales increased by 4.8%, with volume growth driven by the continued rollout of its ‘fresh first’ store revamp programme and favourable weather conditions.
The group’s Booker division saw overall like-for-like sales grow by 1.7%, with robust growth in its core retail and catering operations offsetting a continuing decline in the tobacco market.
Retail like-for-like sales increased by 4.1% year-on-year, driven by its symbol brands (Premier, Londis, Budgens and Family Shopper), with a further 275 net new retailers acquired in the half. Catering sales increased by 5.7%, with volume growth supported by favourable weather conditions and competitive pricing.
Meanwhile, Tesco operations in Central Europe saw like-for-like sales grow by 3.4%, with increases across all countries. Food like-for-like sales rose 4.0%, with the fresh category up 7.0%. The group noted that targeted price investments enabled it to remain competitive across all markets and contributed to an improvement in its customer net promoter scores.
NAM Implications:
- Much depends on whether the consumer perceives there to be a real Christmas price war…
- And given their newfound willingness to shop around…
- …savvy consumers will seek out and respond to real cuts vs retail rivals.
- The problem for Asda and Morrisons is that the other mults appear to have the funds to push…
