First quarter figures from Tesco confirm the UK’s biggest retailer experienced a jump in sales during coronavirus lockdown, with its online and convenience operations performing particularly well. However, the group stated that its retail profits for the year will only be in line with the previous period after facing significantly higher costs related to maintaining supplies and keeping its staff and customers safe.
Over the 13 weeks to 30 May, total UK sales climbed 9.1% to £9.91bn with like-for-likes up a healthy 8.7% after the business benefitted from stockpiling early in the pandemic and raised demand there after as people consumed more food at home. As flagged by other chains, Tesco saw shopping frequency down (-32%) but basket sizes up (+64%).
Growth was most marked in online with sales jumping 48.5% for the quarter as a whole and the rate of growth increasing to nearly 100% by the end of May. To meet the surge in demand for deliveries, Tesco doubled its online capacity during the period and is now fulfilling over 1.3 million orders per week.
Tesco’s convenience business also performed well as consumers did more of their shopping locally during the lockdown. Sales in the division grew by 9.5%, aided particularly strong performance from its One Stop chain. The group revealed that 54 One Stop stores converted to its Tesco Express format saw average sales uplifts of 42%.
In first for the retailer, Tesco provided some insight into the performance of its Jack’s discount format. The group said sales at all the stores were running at more than £100k a week with like-for-likes up a whopping 62% during the period.
Tesco also highlighted the success of its ‘Aldi Price Match’ campaign that launched in March, just before the UK went into lockdown. It claims to have seen net switching gains to Tesco from Aldi for the first time in over a decade. Earlier this week, it was revealed that Tesco would be ramping up the campaign and adopting an EDLP strategy to combat the discounters during an expected coronavirus-driven recession.
The group confirmed today that it was extending ‘Aldi Price Match’ to nearly 500 own label and branded products with it pledging to “continue to seek further opportunities to bring even greater everyday value to customers at this challenging time”.
Tesco revealed that promotional participation reduced from 28% to 14% during the period as it focused on product availability. It saw major shifts in product and category mix as customers focused more on purchases of essential items. In the UK, food sales grew around 12%, whereas discretionary categories such as clothing saw sales declines of around 20%. However, the group said sales in general merchandise had recovered through the quarter with some categories – toys, home, stationery and electrical – now growing strongly.
The group’s operations in the Republic of Ireland saw total sales surge up 19.7% to £697m with like-for-like growth of 20.5% as the market saw similar shopping trends as experienced in the UK. Online sales grew 50.9% and convenience sales were up 11.8%
Booker saw total sales grow 6% to £1.61bn, including a 5% contribution from the Best Food Logistics business it acquired in early March. However, like-for-likes were up only 0.6% after a 24% uplift in the wholesaler’s retail business was offset by a 32% fall in its catering offer after the shutdown of the hospitality sector.
Growth was also more subdued in Tesco’s businesses in Central Europe after the region was not hit as hard by the coronavirus outbreak. Excluding its chain in Poland, which is in the process of being sold, the division’s total sales rose 3.3% to £968m with like-for-like growth of 3.9%.
Meanwhile, Tesco highlighted that the boost in sales volumes had been counteracted by increased costs related to the challenges of operating during the pandemic. The majority of this came from increased staff costs as it offered paid leave to 26,000 vulnerable workers and hired an extra 47,000 people to meet the increased demand. It also incurred costs in areas such as distribution and in its stores to introduce social distancing measures.
Tesco’s latest estimate for extra charges this year is £840m with these only partially mitigated by UK business rates relief of £532m and additional food sales. Annual retail operating profits are expected to remain at around the same levels as last year, while Tesco Bank is forecast to swing to a loss of between £175-200m from last year’s profit of £193m due to potentially higher bad debts during the recession.
Chief Executive Dave Lewis, who is due to step down at the end of September, said it had been “a very challenging period for everyone”.
He added: “The results clearly show the impact of the pandemic and the unique competitive advantage of the Tesco business model.”
Neil Shah, director of research at Edison Group said that Tesco had “clearly benefited from their revised strategy, helping them restore confidence in the group”.
But he highlighted that Aldi and Lidl were continuing to gain market share and Tesco’s current results might not be replicated when the UK is fully out of lockdown.
NAM Implications:
- Key for NAMs to compare their Tesco business performance across all of the above metrics…
- …and optimise resulting strengths.
- Meanwhile, it becomes obvious that the UK No.1 retailer will no longer allow Aldi and Lidl to grow share at their expense.
- The only question is how other mults will react…
