Sales of Britain’s biggest retailer, Tesco, rose 0.7% in the six months to August 27, compared with expectations of a 0.07% decline
A Tesco supermarket in Potters Bar, the UK. Picture: Picture: BLOOMBERG/CHRIS RATCLIFFE
Say it quietly: Inflation isn’t all bad for supermarkets.
Amid predictions of the cost-of-living crisis devastating the consumer industries, Britain’s biggest retailer, Tesco, reported better-than-expected first-half sales on Wednesday, as higher prices and Brits enjoying themselves during the summer heatwave boosted revenue. Tesco said UK like-for-like sales rose 0.7% in the six months to August 27, compared with expectations of a 0.07% decline.
Rising prices tend to inflate the value of supermarket sales. As long as they can control the decline in sales volume, they should automatically see an uplift in same-store sales compared with the year earlier.
Even as Tesco CEO Ken Murphy said the supermarket was raising prices “a little bit less and a little bit later than the market”, it can’t escape the helpful impact of inflation on sales. It may also be picking up shoppers trading down from pricier rivals. Though it is more expensive than Aldi and Lidl, its broader range of products and bigger car parks help to offset that disadvantage.
That said, an inflationary environment is not without its challenges.
Watching every penny
As Britons watch every penny amid soaring household energy bills, they are more inclined to shop around and visit the UK arms of the German discounters. Last month, data provider Kantar said that Aldi had overtaken Morrisons to become Britain’s fourth-biggest grocer by market share.
Consequently, Tesco is having to keep its prices rising less than the broader market — where food price inflation is into the double digits — in an effort to stem the tide of customers to competitors. As well as matching the price of hundreds of items to Aldi, and limiting special offers to members of its Clubcard loyalty programme, on Wednesday the company said that the prices of more than 1,000 everyday items would remain stable until 2023.
Analysts at Bernstein have estimated that Tesco is 15% more expensive than Aldi and Lidl. But the CEO said on Wednesday that the company had cut the differential to well below this figure over the last 12 months.
Like Walmart in the US, [Tesco] could benefit from customers of more expensive food retailers, such as Marks & Spencer and privately held Waitrose, trading down.
Still, it can’t be complacent. Aldi has said it will do whatever it takes to maintain its price advantage. And Tesco’s efforts to control prices, together with pressure on the grocer’s own costs from wages — it announced a further pay rise for staff on Wednesday — and energy, are taking their toll on profits.
Even as Tesco said full-year free cash flow from its retail operations would be at the top of its £1.4bn ($1.6bn) to £1.8bn range, it now expects operating profit of between £2.4bn and £2.5bn in the year to the end of February 2023. That’s below the previous range up to £2.6bn. Shares in Tesco fell as much as 3%.
That looks overdone. Tesco is stepping up its price offensive, something that I have long argued is necessary, not only to prevent its customers defecting to the hard discounters, but to put pressure on other mainstream supermarkets. This includes Sainsbury’s and also Morrisons and Asda, which are now in private hands, saddled with hefty borrowings. Caution on the full-year forecast gives Murphy more room for manoeuvre on price.
As the biggest British supermarket by market share, Tesco should also have more clout with suppliers. Manufacturers reserve the best deals for retailers that can generate the most growth, and Tesco has probably had the best sales momentum for about 15 years. Inflation is helpful to Tesco in another way, too: Like Walmart in the US, it could benefit from customers of more expensive food retailers, such as Marks & Spencer and privately held Waitrose, trading down.
The crucial Christmas period will be the next test of whether Tesco can maintain the advantage it is quietly carving out for itself. If Murphy can keep his foot on the price-cutting gas, it has a good chance of emerging as one of this year’s festive season winners.
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Bloomberg
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