Tesco chief Ken Murphy
(Picture: Tesco)Tesco is protecting its profit margins — for now.
Today’s results show that the UK’s biggest supermarket creamed 4.6% off the top as profit last year, up from 3.1% the year prior when Covid costs weighed on the business.
But pressure is intensifying as the cost-of-living crisis ramps up and inflation soars.
Shoppers are already switching to value chains such as Aldi and Lidl, according to Kantar, and Tesco is seeing its own costs mount up.
Tesco is holding its own thanks to its Aldi price match, its Clubcard discount programme, and the launch of new “low everyday prices”, which are helping the supermarket to grow market share as others watch theirs decline.
How long can it last? The grocery price war isn’t going away any time soon, with City broker Peel Hunt this week predicting food inflation could hit an eye-watering 10% later this year.
That will prompt bargain hunting and canny grocers will keep teasing customers away with offers. It will be hard for Tesco to pass on rising wholesale costs.
Wage bills are going up too. Tesco said last week it was hiking pay for staff come July — by as much as 90p an hour for delivery drivers and those working in click and collect.
That is to help it keep pace with rivals who are upping pay and to help its own staff deal with the cost-of-living crisis.
All of the above means today’s figures will be the high water mark for profits. Tesco was downbeat on prospects for the year ahead, warning earnings could fall by as much as £400 million this year.
The sharp drop is in part because boss Ken Murphy wants to protect market share, even if it costs profits.
That’s the kind of long-term thinking we often miss in the City. Hanging on to customers will give the supermarket a strong base to rebuild profits from once pressure eases (whenever that might be).
Murphy looks like the right man to steer the ship through choppy waters.
