By James Davey and Paul Sandle
LONDON (Reuters) -Britain’s biggest retailer Tesco said it was unlikely to grow its profits this year as inflation continued to take a toll on its customers and suppliers, after it recorded a 6.3% drop in 2022/23.
With a 27% market share, Tesco has navigated the unprecedented cost inflation better than most, using its size to secure better terms from suppliers and retaining customers by matching prices on key items with discounter Aldi and leveraging its popular Clubcard loyalty scheme.
Its sales rose 5.3% to 57.6 billion pounds in its 2022/23 financial year driven by UK inflation hitting a 40-year high of 11.1% in October, but the rising cost of wages, utility bills and goods hit profits, while customers searched for value.
“It’s been an incredibly tough year for many of our customers,” Chief Executive Ken Murphy said, noting Tesco also recognised the “real pressures” faced by suppliers.
“However, at a time when we have been focused on mitigating the impact of inflation, we also haven’t been afraid to have direct conversations (with suppliers) when necessary in the interest of our customers,” he told reporters.
Shares in the group were up 1.8%, extending gains over the last six months to 35%.
One top 40 shareholder said Tesco’s attraction was its dividend yield of over 4% and cash generation qualities.
“Tesco is continuing to cement its position as the UK’s top supermarket,” said Zoe Gillespie, investment manager at RBC Brewin Dolphin. “Profits may be down, but that was to be expected from the pressures of the cost-of-living crisis and post-pandemic normalisation in shopping habits.”
Murphy said he expected inflation to moderate through the year, led by falling commodity prices in categories including oils and grains.
“So we would hope that certain areas, in bakery, you’d start to see some deflation,” he said, though he noted prices were still rising in areas such as rice and proteins.
Tesco cut the price of milk for the first time since 2020 on Wednesday.
Murphy also expects Tesco to benefit as customers, facing the biggest two-year squeeze in living standards since comparable records started in the 1950s, eat more at home.
CONSUMER PRESSURE
Tesco’s retail adjusted operating profit, its key measure, was 2.49 billion pounds ($3.11 billion) in the year to Feb. 25 – in line with guidance of 2.4-2.5 billion pounds but down from the 2.65 billion pounds made in 2021/22.
Tesco expects to deliver broadly flat operating profit in 2023/24.
British consumers have been pressured for more than a year by high inflation which has outstripped pay growth.
UK consumer price inflation ran at 10.4% in February, the most recent official data shows. In March, grocery inflation rose to a record 17.5%, while rising utility bills along with higher taxes and interest rates are also hitting household budgets.
Monthly industry data has shown Tesco performing solidly versus its traditional rivals Sainsbury’s, Asda and Morrisons, though it is still losing market share to German-owned discounters Aldi and Lidl, who are continuing to open new stores.
A decision by Tesco to take a hit on inflation, rather than pass on all the higher costs to customers, reflects a desire to maintain its market share through the downturn.
Tesco is paying a full year dividend of 10.9 pence a share, in line with the previous year, and said it would buy back another 750 million pounds of shares over the next year.
($1 = 0.8012 pounds)
(Reporting by James Davey and Paul Sandle, editing by Kate Holton and Sharon Singleton)
