Alongside its interim results today, Tesco warned that its full-year profit was now set to come in at the lower end of its previous guidance due to cost inflation and the squeeze on consumers’ spending power.
For the six months to 27 August, the group’s underlying retail operating profit slid 10% to £1.25bn. Chief Executive Ken Murphy stated that the decline reflected its decision to maintain the best value possible for the customer, with it “inflating prices a little bit less and a little bit later” than the competition.
Tesco noted that customers were continuing to change their shopping habits to save money and reduce waste. “We are seeing more frequent shops, smaller basket sizes and less shopping online,” Murphy said, adding customers were also buying more cheaper own-label goods and frozen foods.
“We know our customers are facing a tough time and watching every penny to make ends meet,” he said.
Murphy went on to say: “As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market.”
Tesco announced today that it was freezing prices on more than 1,000 everyday products until 2023, contributing to its lower profit guidance.
The company now expects its operating profit for the current financial year to be between £2.4bn and £2.5bn, down from an earlier forecast of £2.4bn-£2.6bn. This compares to the £2.65bn it made in 2021/22.
The group’s total first-half retail sales rose 3.1% to £27.64bn, boosted by strong growth at Booker and in Central Europe.
Despite tough competition from Aldi and Lidl, Tesco’s like-for-like sales in the UK edged up 0.7% after its performance strengthened in the second quarter (+2.8%). The retailer noted that inflation gradually increased across the half, although customers continued to respond well to its offer. It also benefited from the warm summer weather and Platinum Jubilee celebrations.
Sales grew in both its large and convenience outlets, by +1.4% and +6.5% respectively, driven by higher footfall as people switched back into stores from online.
Online like-for-like sales declined by 11.3%, although sales participation in the channel was 12.9%, which is still 3.6ppts higher than before the pandemic, with the retailer claiming to have retained nearly 70% of its peak active customer base.
At Booker, like-for-like sales grew 13.9%, driven by the recovery in catering demand in the first quarter as it traded over a period of Covid restrictions in the prior year. Catering sales grew by 35.5% over the first half, driven by increased volume and inflation, which the group noted was particularly prominent in fresh food. Booker’s retail business also continued to grow, with sales up 6.7% (excluding tobacco).
In Ireland, like-for-like sales edged down 0.1% in the half after a decline of 2.4% in the first quarter against tough comparatives with a lockdown period. In the second quarter, Tesco’s sales grew by 2.4%, partly reflecting an increase in inflation in the market.
In Central Europe, the group’s like-for-like sales increased by 10.4%, with growth in all the countries it operates. Tesco noted that inflationary pressures were felt to a greater extent across these markets, with significant levels of input cost inflation. However, volumes were said to be resilient due to government support for consumers, such as price caps on essential food products.
Tesco’s shares were down over 2% in early trading, extending 2022 losses to 29%. Nevertheless, most analysts consider it best placed among the major supermarket chains to navigate the economic downturn and cost pressures due to its vast buying power.
Richard Hunter, head of markets at Interactive Investor, pointed to Tesco’s cash generation after it upgraded its expectation for full-year retail free cash flow to at least £1.8bn.
“The group’s sheer scale has also enabled price increases to be kept to a relative minimum, while its long-established supplier relationships ease some of the pressure compared to many of its rivals,” he said.
However, Matt Britzman, equity analyst at Hargreaves Lansdown, said Tesco was facing increasing pressure from competitors as shoppers felt the pinch.
“Supermarkets are no strangers to dealing with cost-of-living pressures, there’s been an all-out price war in the industry for some years now,” he said.
“Amongst the larger players, Tesco’s arguably been one of the standout businesses in the battle against low-cost outfits [such as Aldi and Lidl], but pressures on consumer spending can only build for so long before something must give.”
NAM Implications:
- Despite its scale and own label repertoire making it easier to optimise an uncertain future…
- Two pressures remain:
- Cost-of living pressures not fully emerged, as yet i.e shoppers ‘shopping around for value’
- Discounters continuing to grow at mults’ expense
- Meaning Tesco will increasingly need to turn to suppliers in maintaining a price-freeze on essentials.
- From a supplier POV, the question has to be: How are we meant to help?
- (without compromising our need for fair share of investment and sales…)
