Tesco Plc said profit probably won’t change much this year as the UK’s biggest supermarket operator manages to offset at least some cost pressures from rampant inflation.
(Bloomberg) — Tesco Plc said profit probably won’t change much this year as the UK’s biggest supermarket operator manages to offset at least some cost pressures from rampant inflation.
The grocer expects retail adjusted operating profit to be “broadly flat” after reporting £2.5 billion ($3.1 billion) in the year through February, it said in a statement Thursday. That was in line with its previous guidance. The shares rose as much as 2.6% in London trading.
Tesco figures it’s the “most competitive” it has ever been for customers as Chief Executive Officer Ken Murphy describes battling unprecedented levels of inflation.
The grocer has been trying to keep costs low to attract customers while also paying higher energy bills and staff wages. Like rivals, Tesco has faced tough competition from discount grocers Aldi and Lidl as cash-strapped shoppers seek to save money on their groceries.
“Conditions favor them right now,” Murphy said on a call with journalists, referring to the discounters. “We expect the UK market to be intensely competitive, but we think we’re as well positioned as we can possibly be.”
Tesco is matching prices on hundreds of products against Aldi and increasing the promotions offered through its Clubcard loyalty scheme. Rival J Sainsbury Plc stepped up competition this week by offering lower prices to its 18 million Nectar card holders.
Milk Price
As part of measures to keep prices low, Tesco cut the price of milk for the first time in about three years this week, and it froze prices on more than 1,000 everyday items until July.
Tesco expects inflation to moderate this year and the supermarket chain is already seeing some deflation in areas like oils and grains that could lower prices in baked goods, Murphy said, adding that rice and proteins are still seeing strong increases.
To save money, shoppers are buying more chicken and other white meats rather than red, according to Murphy. They are also cooking bigger batches of food for economies of scale and making use of leftovers. Tesco expects sales to be bolstered by consumers eating in more often and having more staycations in the UK.
“Customers will continue to look for competitive prices and values very closely,” Murphy said on the call. “They will keep in place all the economizing actions that they took last year when the cost of living kicked in.”
In response to rising costs, Tesco is trying to make £1 billion of savings by February 2024. The chain is eliminating hundreds of manager roles across its stores and closing all remaining food counters and hot delis. It’s also raising the minimum spending for online delivery to £50 from £40 and increasing the minimum basket charge to £5 from £4 for orders that don’t reach the limit.
Tesco said it has bought back more than £1 billion worth of shares and on Thursday announced a further £750 million of buybacks over the next year.
What Bloomberg Intelligence Says:
Tesco’s flat operating-profit guidance seems realistic in the face of continuing cost inflation and a flat-to-declining sales volume, yet may disappoint, given very positive sentiment. Fiscal 2023 retail free cash flow of £2.1 billion — 31% ahead of expectations — inspires confidence about the sustainability of the annual £750 million share-buyback program and the maintained 10.9 pence total dividend. Such shareholder returns may compensate for any profit disappointment.
— Charles Allen, BI retail industry analyst
Tesco, which also owns wholesaler Booker, has an almost 27% share of the UK grocery market and employs more than 340,000 people. In February, the company announced its third pay rise in 10 months with an investment of £230 million. That means that store workers receive £11.02 an hour from this month, up from £10.30.
(An earlier version of this article was corrected to change last year’s operating profit.)
(Updates with CEO comments from fifth paragraph)
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