Tesco plays it cool
Britain’s biggest supermarket sounds pessimistic about soaring inflation. It’s in a stronger position than it wants to admit. Cris Sholto Heaton reports
“Tesco is protecting its profit margins – for now,” says Oscar Williams-Grut in the Evening Standard. Britain’s biggest supermarket reported operating profits of £2.8bn for 2021, with operating margins rising to 4.6%, up from 3.1% the previous year. “But pressure is intensifying as the cost of living crisis ramps up and inflation soars.” Shoppers are turning to discount chains such as Aldi and Lidl, forcing Tesco to respond with price matches, discounts and other promotions. Wholesale food prices are going up, as are wage bills, and it will be increasingly hard to pass these on to consumers.
Hence these results “will be the high-water mark for profits”, with chief executive Ken Murphy saying earnings could drop by £400m in the coming year. That downbeat outlook took the City by surprise and Tesco shares dropped 6% in response. But Murphy is right to prioritise protecting the firm’s market share. “Hanging onto customers will give the supermarket a strong base to rebuild profits once pressure eases.”
A bad time to make big profits
Tesco is being “rightly cautious”, but also “mildly disingenuous”, says Lex in the Financial Times. “Historically, inflation boosts supermarket profits.” When food staples rise in price, people don’t cut back on them – instead they trim discretionary spending elsewhere and put the savings back into paying for these necessities. Tesco is the industry leader, with a 27% market share, giving it plenty of leverage to demand better deals from suppliers. It has already learned important lessons from the last crisis, when it focused too much on margins and “sent customers to discounters”.
The bigger problem is political. “Minting big profits during a cost of living crisis is not a good look”, especially when campaigners are already pointing out that rising food prices have a disproportionate impact on lower earners. Thus the need to offer some eye-catching discounts – “Tesco brags that some items are cheaper than a decade ago.” Its public wariness makes sense, for all these reasons. “But the odds are that inflation causes less pain to shops than shoppers.”
Bear in mind also that “as customers’ budgets are squeezed, they may trade dining out for more grocery dinners”, says Andrea Felsted on Bloomberg. Results from US supermarket chains such as Albertsons and Kroger suggest this is happening. Tesco may end up a beneficiary if the same trend takes off in the UK.
Of course, the firm can’t avoid the threat posed by Aldi and Lidl – it is wisely price-matching Aldi on 600 products. But slashing prices could also be an opportunity. Asda and Morrisons, two of its biggest rivals, are now in private hands. They have taken on large borrowings to fund those buy-outs and may be in a weaker position to compete. “Tesco should go further with its price cuts. Amid the cost of living crisis, it has a once-in-a-lifetime opportunity to weaken Asda and Morrison, as well as its listed competitor J Sainsbury.”