Tesco Sees No Profit Growth on Inflation Burden

Article content

(Bloomberg) — Tesco Plc will likely struggle to increase profits this year as inflation continues to weigh on the UK’s largest supermarket operator.

Article content

The grocer expects retail-adjusted operating profit to be broadly flat after reporting 2.5 billion pounds ($3.1 billion) in the year to February, it said in a statement Thursday.

Article content

Chief Executive Ken Murphy said Tesco was grappling with “unprecedented levels of inflation” in the prices paid to suppliers and the cost of running the business. They are mitigating that for clients.

Like competitors, Tesco has faced stiff competition from discount groceries Aldi and Lidl as cash-strapped shoppers seek to save money on their groceries. The retailer tries to keep costs low to attract customers while paying higher energy bills and employee wages.

Tesco said it was the “most competitive” customer it had ever been. It matches prices on hundreds of products against the Aldi discount and maximizes promotions offered through its Clubcard loyalty scheme. Rival J Sainsbury Plc stepped up this week by offering 18 million Nectar cardholders lower rates.

Article content

Article content

The price of milk

As part of measures to keep prices low, Tesco cut the price of milk for the first time in nearly three years this week, and froze prices of more than 1,000 everyday items through July.

Tesco’s retail profit for the year ended February was in line with its previous guidance and total profit numbers, including Tesco Bank’s, matched analyst estimates.

Tesco, which also owns wholesaler Booker, has approximately 27% of the UK grocery market and employs more than 340,000 people.

In response to rising costs, Tesco is trying to achieve savings of £1 billion by February 2024. The chain is seeking to shed hundreds of management roles across its stores and close all remaining food and deli counters. They are also raising the minimum spend for online delivery to £50 from £40 and increasing the minimum cart fee to £5 from £4 for orders that don’t reach the cap.

Article content

Tesco said it had bought back more than £1bn worth of shares and on Thursday announced a further £750m of buybacks over the next year.

What Bloomberg Intelligence says:

Tesco’s steady operating profit guidance appears realistic in the face of continued cost inflation and steady to declining sales volume, however it may be disappointing, given the very positive sentiment. Retail free cash flow in financial year 2023 of £2.1bn – 31% ahead of expectations – inspires confidence about the sustainability of our annual share buyback program of £750m and total dividends of 10.9p. These shareholder returns may make up for any profit disappointment.

– Charles Allen, BI Retail Industry Analyst

(An earlier version of this article was corrected for last year’s operating profit change.)