Tesco warns on profit hit as it keeps prices low

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Tesco lifted profits last year but the UK’s biggest supermarket group has warned earnings will suffer this year as it prioritises price competitiveness in the face of soaring costs and a vicious squeeze on household incomes.

Chief executive Ken Murphy said on Wednesday that while the full impact of rising inflation was yet to be felt, surveys showed that customers were “starting to look at how to manage their budgets and the trade-offs they will make”.

Official inflation data released the same day showed that food price inflation reached 5.9 per cent in March, its highest level in more than a decade. Even prices of staple items such as bread, milk and fruit — which supermarkets generally try to hold down — rose more than 5 per cent.

Murphy said that over the year to February, Tesco’s selling prices declined 0.6 per cent overall but had begun to rise in the second half as costs climbed. He added that the grocer tended to raise prices “a little bit later and by a little bit less than the market” and that as a result its increases were below the industry averages reported by research group Kantar and others.

He said price pressure was especially acute in products with high energy inputs and in proteins, owing to the rising cost of animal feedstuffs. Pig prices have risen by a fifth in recent weeks, according to the UK’s Agriculture and Horticulture Development Board.

Reflecting the uncertainty, the supermarket group said it expected retail operating profit for the year to February 2023 of roughly £2.4bn to £2.6bn. Analysts had been predicting about £2.81bn of group operating profit for this year, implying retail profit of roughly £2.65bn once financial services are stripped out.

Tesco shares fell more than 6 per cent in morning trade.

Imran Nawaz, the group’s finance director, acknowledged that Tesco “may need to do more” on cost mitigation, having previously said it would aim to achieve £1bn of cost savings over three years.

But analysts at Citigroup, the company’s broker, said they expected Tesco to use its scale and strong balance sheet to stay competitive on price and keep the pressure on rivals.

“Whilst the downgrade [to forecast profit] is unwelcome, the logic is not . . . the new management team has a strategy to push harder into the downturn and to emerge in a stronger competitive position,” they said in a note to clients.

Murphy said the tightening squeeze on household incomes made it difficult to forecast how shopper behaviour would evolve following the easing of coronavirus restrictions.

A resurgence of eating out and overseas travel had resulted in consumers reverting to more frequent shops with lower basket sizes, but the emergence of cost pressure “may slow the reversion down”.

“People may choose to work from home more often and eat at home more often,” he said, adding that he was “curious” to see how the pandemic trend towards rapid delivery would fare at a time when incomes were under pressure.

For the year to February 26 2022, retail operating profit was £2.65bn, in line with forecasts and up 35 per cent on the previous year as coronavirus-related costs fell away and shopping habits began to revert to pre-pandemic norms.

The group’s banking unit generated a £176mn profit and is expected to make between £120mn and £160mn this year.

Tesco has bought back about £300mn of shares since last October, and on Wednesday committed to buying a further £750mn back over the next 12 months.

The company also declared a total dividend of 10.9p per share, up 19 per cent from last year and the highest payout since 2014 if special dividends are excluded.

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