Tesco set to lay bare profit impact as inflation eats into margins

Tesco is next week expected to reveal a dip in profits for the past year as the retail giant grapples with inflationary pressures and changing shopping habits.

The UK’s largest retailer will update investors and analysts over its financial performance for the year to February in an update expected on Thursday. A consensus of analysts has said Tesco is due to reveal a strong rise in sales but lower profits due to the challenging backdrop for costs. It is predicted to unveil a group adjusted operating profit of £2.6 billion for the year, which would be down slightly from some £2.8bn a year earlier.

Profitability has been dented by rocketing energy prices and higher labour costs over the past year. The annual rate of UK consumer price index (CPI) inflation saw a surprise increase to 10.4 per cent in February due to increased pressure on food prices, which worsened as a result of recent fruit and vegetable shortages. Food and non-alcoholic drinks prices rose by 18 per cent year on year in February, according to the Office for National Statistics (ONS).

Tesco’s buying power will have shielded the group from inflation quite this high but chief executive Ken Murphy said at the firm’s previous update in January that it expected more inflation to hit the retailer. Shareholders will be eager for the company to outline whether its cost inflation is starting to ease back yet or if profits are likely to remain constricted for longer.

Profitability has also been dented by the retailer’s investment in prices to keep customers coming through the door in the face of the continued growth of German discounter rivals Aldi and Lidl. The efforts on value have helped support significant sales growth, with revenues expected to have risen to £65.7bn over the past year from £54.8bn. Analysts have suggested that shareholders will be looking for efforts from the group to continue to support its market share amid the volatile economic backdrop.

Sophie Lund-Yates, lead equity analyst at investment platform Hargreaves Lansdown, said: “Next week, we’ll hear how the UK’s biggest retailer is getting on. Grocery inflation is well documented. That means customers are seriously feeling the pinch when it comes to their food shopping and Tesco’s scale means it’s in the eye of that storm. Remaining competitive in this environment makes inflating margins difficult.

“As the market leader, the group has a market share of over 27 per cent but, because of tough conditions, supermarkets like Aldi are enticing new customers. We don’t expect the league tables to be upended. But it will be important to assess if Tesco’s share has been nibbled away at, which would suggest consumer pressure is higher than previously thought.’’

Analysts at brokerage Shore Capital said inflation continued to dominate the picture for Britain’s big supermarket operators. They noted: “We expect inflation to be sticky for the next two quarters, possibly easing by Q4; that implies better volume and mix in [calendar year] 2024. Maybe brighter times ahead. In [2022] the grocers had the Fifa World Cup in Qatar, some 14 weeks of summer sunshine in England and Wales, and a big pandemic influenced Christmas. In [2023] the events are more modest bar Charlie’s coronation. Hence, there is probably a bit of a comparative headwind. NielsenIQ is predicting a big inflation fuelled Easter.”

Tesco continues to dominate the UK grocery sector with a market share of over 27 per cent.

They added: “Supermarkets are having to pass-through the cost recovery by the trade, which we expect to run through to the end of Q3, perhaps easing off thereafter. We continue to observe the unnatural share gains by the German discount chains as many shoppers manage budgets; shopping trip frequency is high across the board.”

Bosses at Tesco will also have an opportunity to keep shareholders updated regarding its current strategy, which has seen the company cut further costs, such as through a management overhaul announced in January which impacts some 2,100 roles. The group is to extend changes to store management roles, shut remaining counters and hot delis and close a number of in-store pharmacies as part of its latest shake-up. Tesco is to reduce the number of lead and team managers in large stores as part of the changes to its management structure, which will impact some 1,750 workers. It said the move will also introduce around 1,800 new shift leader roles in stores, leading operational duties on the shop floor.

Amid its wide-ranging overhaul, the group also confirmed that it would close its remaining counters and hot delis at stores from February 26, having previously removed counters from the majority of outlets. Bosses claim they have seen a “significant decrease in demand” for counter service over the last few years, with customers no longer seeing them as a significant reason to shop with Tesco. The retailer also revealed 350 workers will be impacted by a series of localised changes, such as the closure of eight pharmacies and reduced hours at some in-store post offices.

Tesco’s trading has been robust in the face of consumer belt-tightening and fierce competition from rapidly expanding discounters Aldi and Lidl, as well as the likes of B&M, Poundland and Home Bargains as more of us shop around for the best deals on non-food items. Tesco has previously revealed that its group like-for-like sales, excluding fuel, grew by 7.9 per cent over the six weeks to January 7, compared with the same period a year earlier. The group also highlighted a 7.4 per cent increase in sales volume of its low everyday prices range after launching a “price lock” commitment on these products in October.