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Tesco pledges to rein in prices as inflation squeeze tightens

·Finance Reporter, Yahoo Finance UK
·3 min read
Tesco Shoppers walk next to the clubcard price branding inside a branch of a Tesco Extra Supermarket in London, Britain, February 10, 2022. Picture taken February 10, 2022. REUTERS/Paul Childs
Tesco has said that ‘significant uncertainties’ weigh on business despite pre-tax profits jumping from £1.1bn to £2.2bn. Photo: Paul Childs/Reuters

Tesco (TSCO.L) doubled pre-tax profits to more than £2bn last year but has warned profits for this year will come under pressure this year from soaring inflation.

The supermarket giant said it was “laser focused” on trying to keep prices low for its customers, but costs are rising across the board and it said it was seeing early signs that shoppers are beginning to tighten their belts in the face of the cost-of-living crisis.

Read more: Majority of UK consumers see rise in cost of weekly grocery shop

Tesco saw group pre-tax profits jump to £2.03bn in the year to February 26, up from £636m the previous year, thanks to rising sales and lower costs related to the pandemic. Total revenues rose by 6% to £61.3bn.

The group said sales excluding fuel rose by 2.5% to £54.8bn, with UK like-for-like growth of 0.4% – up 8.2% on a pre-pandemic two-year comparison.

Profits were helped as it saw COVID costs fall to £220m from £892m the previous year.

“Clearly, the external environment has become more challenging in recent months,” said chief executive Ken Murphy. “Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check,” he added.

As a result of uncertainty in the market, Tesco broadened its forecast of profits for this year to between £2.4bn and £2.6bn – less than the £2.84bn predicted by analysts.

Shares in the company, which has a share of more than 27% of Britain's grocery market, fell 5% in early Wednesday trading, the biggest decline of a blue-chip stock in Europe.

Tesco online business was lower as sales declined by 6.5% because some customers chose to return to shopping in stores as the pandemic eased.

Danni Hewson, financial analyst at AJ Bell, said: “Inflation is an issue for the business, nonetheless. The coming months will be challenging for Tesco as it faces higher cost inflation and a potential shift in how consumers spend their money. That explains why its share price has fallen nearly 5% on the results, and why Ocado and Sainsbury’s shares are also weak.

Read more: UK inflation hits 30-year high of 7% as cost of living crisis deepens

“There is a real risk that cash-strapped families will cut back on their shopping. Even though we all need to eat and drink, there is a high chance that shopping baskets may not contain as many treats as households have been consuming of late. If everyone cuts back on a few items each week, this loss of income for Tesco will certainly add up.

“If this trend does play out as expected, it won’t just be Tesco feeling the pain. On a two-year basis, Asda, Morrisons, Sainsbury’s and Co-op have all lost market share and these businesses will certainly not want to see further bad news in the form of customers tightening their belts.

“In fact, if supermarkets suffers from people deciding to buy fewer chocolate biscuits or a nice bottle of wine, you can almost be certain that other consumer-facing companies such as fashion sellers and electronics retailers will also be experiencing a shift in how their customers are spending.”

Up to 290,000 shop staff, call centre and warehouse workers at Tesco are being awarded a bonus as a special thank you for their efforts over the past year, the retailer announced.

Tesco said it will pay out nearly £50m in “thank you” bonuses to employees across its stores, customer fulfilment and customer engagement centres, worth 1.25% of their annual salaries, at the end of May.

However, the supermarket said in February it would axe more than 1,000 jobs as it sought to contain rapidly rising labour costs.

Watch: Easy budgeting tips for when you leave home