Best-in-class Tesco really is top of the shops
TESCO’S results last week showed the supermarket giant finished the year on a high with rising performance as volumes increased.
Customers buying a greater number of items helped off-set the impact of falling inflation. Overall, its sales rose 7.2% to £61.5billion last year, ignoring the effect of exchange rates.
Together with £640million of savings, underlying operating profit for the retail business rose almost 11% to £2.8billion.
The group’s stellar proposition has meant it has been able to increase the full-year dividend by 11%, thanks to the substantial levels of cash pumping through Tesco’s veins. That helps to underpin the group’s attractive 4.5% prospective dividend yield, although no dividend is ever guaranteed.
Tesco’s enormous scale and the mature, deeply-rooted nature of its relationships has been a key tool in allowing the company to keep its prices down compared to rivals.
The group’s strategy relies on being able to offer better all-round pricing than the competition and Tesco has delivered remarkably well on that.
That has helped keep sales moving in the right direction.
And with inflation falling, it’s a trend we hope to see continue. The group also expanded its Tesco Finest range, helping it to poach customers from premium supermarkets.
We view this shift as potentially long-term in nature, meaning there’s more juice to be squeezed.
And Tesco isn’t just a retailer, although that’s the bulk of the story. The wholesaler, Booker, is performing well, with strong growth across the key business streams of catering and retail.
There are challenges to monitor. This includes competition from discounters such as Aldi and long-time rival Sainsbury’s. Retail margins of around 4% don’t leave too much room for manoeuvre where fierce price wars are concerned. Ultimately, Tesco remains a best-in-class option and progress has been impressive. We’re optimistic about the outlook, but there are some uncertainties to keep an eye on.
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