Tesco raised its profit outlook for the second time in four months today after delivering a robust performance over the festive period in the face of growing cost pressures and supply chain challenges.
In the UK, the group’s like-for-like sales rose 0.2% year-on-year in its third-quarter to 27 November and were up 0.3% over the six-week Christmas period to 8 January. All the main supermarkets have faced tough comparisons against Christmas 2020 when a lockdown boosted demand in the sector. Tesco highlighted that its sales were up 6.9% against the same pre-pandemic quarter in 2019, with an 8.8% rise during Christmas on the same basis.
Tesco credited its success to a focus on value which helped it claim its highest market share in four years. Its Clubcard Prices offer has proved particularly successful with over 95% promotional sales now on the scheme.
Online sales in the UK were down 12.2% over the full 19-week period against a significant shift to the channel at the height of the pandemic last year. However, they remain 58.7% higher than pre-Covid levels.
With shoppers returning to stores, like-for-like sales in its large stores rose 2.4% and by 2.7% in its convenience outlets.
Meanwhile, Booker continued its recovery from last year when sales to the catering sector were impacted by the closure of hospitality venues. The wholesaler’s like-for-like sales surged up 17.5% over the 19 week period, with Tesco saying growth was supported by “strong availability” and good performance of the Premier, Londis and Budgens symbol groups.
In Ireland, Tesco’s like-for-like sales slipped 3.3% in the third quarter but grew 0.3% over Christmas after strong online gains.
Tesco’s remaining operations in Central Europe delivered a 4.9% rise in like-for-like sales over the full 19-week period. Performance was driven by its core food offer and a “significant increase” in clothing and general merchandise sales after being held back by Covid restrictions last year.
As a result of stronger than expected sales to date, Tesco now expects a full-year retail operating profit “slightly above” the top-end of its previous £2.5-2.6bn range. The upgrade follows one by Sainsbury’s yesterday and bullish Christmas updates from Aldi and Lidl this week.
“Despite growing cost pressures and supply chain challenges in the industry, we continued to invest to protect availability, doubled down on our commitment to deliver great value and offered our strongest ever festive range,” said Chief Executive Ken Murphy.
“This put us in a strong position to meet customers’ needs as, once again, Covid-19 led to a greater focus on celebrating at home. As a result, we outperformed the market, growing market share and strengthening our value position.”
Tesco joined other retailers in warning that it was currently facing significant operating cost inflation. However, it stressed that inflation for consumers was only about 1% during the festive period.
“When I look at operating costs, our costs to run the business, we typically would work with an inflation assumption of 2% to 3%. This time around I’m thinking that will probably be more close to 5%,” said Chief Financial Officer Imran Nawaz.
He said Tesco would try to mitigate inflation for consumers through its cost-saving programme, adding: “The key question that we’re working through for next (financial) year is which elements of the inflation that we’re seeing is transitory and which ones will persist and that will determine how much savings we need to be driving.”
Tesco’s share price slipped following the release of the trading update. However, John Moore, senior investment manager at Brewin Dolphin, suggested that the signs were good for the UK’s largest grocery retailer.
He said: “Tesco has followed Sainsbury’s with a strong set of Christmas results against tough comparators from last year.
“All cylinders are firing at the company: the core supermarket is growing its market share, online sales are significantly ahead of where they were pre-pandemic, its wholesale arm Booker is posting good quarterly growth helping to maintain overall performance, and the bank is benefitting from action taken and a favourable backdrop.”
Richard Lim, CEO of Retail Economics, added: “Looking forward, the imminent squeeze on incomes will force many households into recessionary behaviours, trading down to own-brand and shopping around as they look to make budgets stretch that little bit further. Tesco is well placed to win new customers with their laser-like focus on value as they double-down on their Clubcard success.”
Meanwhile, Nick Everitt, Director of Advisory, EMEA, Edge by Ascential, said: “Tesco will have to continue to set itself apart from its supermarket rivals. This includes continuing to invest in building out its frictionless experience via an expansion of its checkout-free stores, as well as strengthening its overall omnichannel offering.
“With growing appetite for on-demand groceries, Tesco last year partnered with the ultra-rapid delivery specialist Gorillas in a trial programme, promising a 10-minute delivery service to customers in quest of a convenient and rapid delivery to their doors. The deal will help Tesco to gain valuable learnings in this booming market, with further partnerships and expansion likely as Tesco seeks to maintain its market-leading position.”
NAM Implications:
- ‘All the main supermarkets have faced tough comparisons against Christmas 2020 when a lockdown boosted demand in the sector’
- (Keep in mind that in the first lockdown the mults were able to trade without discounting on shelf prices…
- …meaning they were able to build a financial to weather troubled times ahead)
- Key will be the extent to which they will inflate prices to cover costs in 2022…
- …or, if necessary engage in a price war with the discounters to protect share.
- NB. suppliers need to ensure they have a fair share of investment and returns…
