Tesco has warned that it faces a drop in profits during its current financial year as surging inflation piles pressure on the supermarket’s operations and customers.
During the year to 26 February 2022, the group’s adjusted retail operating profit rose 35.8% to £2.65bn as pandemic-related costs fell away and more normal shopping habits returned. However, it now expects profits of between £2.4bn and £2.6bn for the 2022/23 period, less than the £2.84bn predicted by analysts.
The group noted that the final outcome depends on customer shopping habits, cost inflation, and the extent to which rising costs are absorbed or passed on to consumers. “Given the significant uncertainties in the external environment, we believe it is appropriate to provide profit guidance in the form of a wider than usual range,” Tesco said.
With consumers facing an unprecedented cost of living crisis, the retailer pledged investment to keep prices down.
Chief Executive Ken Murphy said: “Clearly, the external environment has become more challenging in recent months.
“Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check – working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs.”
Murphy highlighted that Tesco was managing to keep price inflation in its stores a “bit under the number for the overall market” as it battles the discounters that are gaining share by attracting cash-strapped shoppers.
He also noted product availability had been maintained but added that products such as sunflower oil were a challenge due to the war in Ukraine.
Murphy said that customer behaviour was returning to more normal patterns as shoppers relied less on supermarkets for their food and drink than they did during the pandemic. Tesco’s online business saw sales decline by 6.5% as people returned to shopping in stores.
The group’s overall sales rose 3.0% to £54.8bn. In the UK, it outperformed its three biggest rivals – Sainsbury’s, Asda and Morrisons – with like-for-like sales up 0.4% against tough comparatives with raised demand during the height of the pandemic.
Meanwhile, Booker benefited from a recovery in catering sales with like-for-like growth of 15.3%. It also added 283 Budgens and Londis stores to its symbol estate across the year.
In Ireland, like-for-like sales declined by 2.9% as it traded over exceptional Covid-related demand the previous year. In Central Europe, Tesco’s sales grew by 2.9%, with growth said to have been particularly strong in Slovakia and Hungary as non-food selling restrictions eased.
“These are mightily impressive results from the retailer,” said Richard Lim, CEO of Retail Economics. “The laser-like focus on delivering low prices that match the discounters has repositioned the value proposition in the eyes of many consumers. Its innovative Clubcard-only discounts are driving improved loyalty with existing customers and winning over new shoppers in a fiercely competitive market.”
He added: “As the cost of living crisis gains momentum, many consumers will be re-evaluating their priorities and we’re likely to see recessionary behaviours kick in fast. For many shoppers, this will mean trading down to own-label brands, switching retailers and scaling back on premium purchases as a more cost-conscious consumer emerges. Tesco is well-positioned to protect its market share given the competitive advantage offered by its loyalty scheme, the digital capabilities within the business and its scale which offers meaningful negotiating power with suppliers.”
NAM Implications:
- Tesco obviously managing City expectations.
- But patently emerging from Lockdown & Ukraine uncertainties relatively unscathed.
- However, even they are finding it difficult to put a number on pipeline uncertainties, especially inflation.
- Meanwhile, Aldi & Lidl are in a position to run in the UK at a loss (financed by their overseas businesses…)
- …to a level unmatchable by Tesco and the mults…
- …in a race for incremental share.
- It has hardly even started yet…
