Tesco nears crucial update as Iran war threatens food inflation
As the bosses of the country’s biggest supermarkets crowded into the chancellor’s office earlier this month, no voice will have been as loud as that of Ken Murphy, chief executive of Tesco.
Rachel Reeves summoned grocery executives to discuss how the Iran war will impact Brits’ weekly shops, and Tesco’s results tomorrow will pull back the curtain on the sector’s response to global supply shocks.
Murphy, who keeps a low profile compared to some of his outspoken counterparts, succeeded “drastic” Dave Lewis as chief executive of Tesco in October 2020. Since then, he has ramped up the supermarket’s competition with discount grocers, adding around 250 products to its Aldi price match range every year.
The supermarket’s boss has also expanded tech investment, more than doubling the headcount of its technology department and expanding the Tesco app, including through the launch of last-minute delivery service Whoosh.
Murphy, perhaps taking a cue from his predecessor Dave Lewis’ reputation for cost-cutting, has launched several job-shedding drives as he aims to “simplify” the firm, including the loss of 180 head office jobs earlier this year.
Tesco has established a gigantic market share over the past decade, as the prevalence of its smaller Tesco Express stores and the brand loyalty of its Clubcard scheme has returned the firm close to the “Tescopoly” it established – and then squandered – around the turn of the century.
The supermarket giant will deliver its full year results on Thursday and, while supermarkets face growing cost pressures and a viciously competitive market, the grocer appears to be as resilient as any.
Tesco, which commands a 28 per cent market share, delivered a quietly confident trading update in early January.
The supermarket reported a strong Christmas period, with sales up three per cent year on year, though investors’ muted reaction to these figures could suggest there is a ceiling to Tesco’s dominance.
Tesco recovers from over-expansion
Like-for-like sales growth fell short of expectations and an underwhelming quarter for Booker, Tesco’s wholesale firm, dragged down the group’s overall performance.
The firm opted not to budge its operating profit forecast – which sit in a £2.9bn and £3.1bn range – but said it expects performance to reach the upper end of this bracket.
The supermarket’s share price has risen by 43 per cent over the last year and by more than 66 per cent over the past two years. Rival Sainsbury’s has matched this pace – with its share price up 44 per cent in the last year – while Marks & Spencer’s stock has fallen eight per cent in the same period.
Richard Hunter, head of markets at Interactive Investor, told CityAM this is a “considerable achievement given the traditional ferocity” of the sector, marking a huge resurgence from Tesco’s lowpoint around the 2010s.
Having commanded a “Tescopoly” in the noughties, the grocer embarked on an ambitious expansion into overseas markets and a range of other services including finance, cafes and gardens.
This “brief international foray” saw the supermarket giant “take its eye off the ball” as it began to neglect its key market, Hunter said.
But through the launch of the Clubcard scheme and Aldi price match pledge, Tesco gradually regained the trust of its core consumers and has seen its market share soar as a result.
The appearance of budget German supermarkets Aldi and Lidl “out of nowhere” in the last decade prompted this resurgence, according to Dan Coatsworth, head of markets at AJ Bell.
He told CityAM: “Competition has been really tough in the grocery sector, and I think they got a realisation that it’s probably better to focus on what you do best, rather than doing as much as possible.
“The way that they fought back from the German discounters was to use the Clubcard scheme to price match.”
Tesco’s loyalty scheme, which was ranked the UK’s best, incentivises return shopping through the huge difference between its standard and Clubcard-discount prices, Coatsworth said.
The supermarket piled more investment into Clubcard last week when it announced a partnership with Adobe to use AI to tailor its app and discount scheme to individual shoppers.
Iran war will dampen outlook
Tesco’s last update came the month before the US and Israel launched strikes on Iran, sparking the conflict that caused global chaos to supply chains and fuel prices, prompting supermarkets to warn they may have to hike prices.
The Food and Drink Federation, which represents the UK’s 12,000 food and drink manufacturers, said food inflation will soar from three to nine per cent by the end of this year – and could reach double figures if the Middle East conflict persists.
The bosses of a number of Tesco’s rivals – including Asda and Marks & Spencer – have called on the government to curb tax on supermarkets to help them avoid raising prices for consumers.
But because the grocer’s financial year runs until the end of February – which is when the war began – its performance for the last year is unlikely to have been damaged by the conflict, though it could warn of disruption to come.
This means Tesco’s backwards-looking results and its forward-looking outlook could be very different in tone, Coatsworth said: “I think it’s going to be a very cautious outlook.”
Higher employment costs and lower consumer spending caused by fears of inflation could also prompt caution for Tesco, so investors will be paying keen attention to the supermarket’s evaluation of these costs.
Market analyst Michael Hewson said: “Guidance is likely to be key here, with all UK food retailers having to bear the costs of higher energy prices, labour costs, as well as increased competition as Aldi and Lidl continue to open new stores.”