Cost of living: Tesco feels the pinch as shoppers count the pennies but staff to get further pay rise

Tesco has posted falling half-year profits and warned that annual earnings will be towards the lower end of hopes as shoppers draw in their purse strings, but staff at the supermarket giant are to receive an additional pay rise.

Britain’s biggest retailer posted a 10 per cent fall in underlying retail operating profits to £1.25 billion for the six months to August 27, despite group sales excluding fuel rising 3.1 per cent to £28.2bn.

It warned of “significant” inflation pressures and a return in food shopper habits to those seen before the pandemic, which it said were being compounded by customer moves to rein in spending amid the cost-of-living crunch.

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The group now expects annual underlying retail earnings of between £2.4bn and £2.5bn - the lower end of previous guidance for between £2.4bn and £2.6bn and a fall from the £2.7bn notched up in the previous year.

Tesco also unveiled its second staff pay rise this year to help support workers amid the cost crisis and said it is freezing the prices of more than 1,000 everyday products until 2023 to help cash-strapped customers.

The basic hourly rate of pay for store staff will increase by a further 20p to £10.30 - or £10.98 in London - from November 13, meaning hourly rates have increased by nearly 8 per cent this year. Tesco will also be doubling its Colleague Clubcard discount to 20 per cent during the key Christmas shopping period from December 13-19.

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Chief executive Ken Murphy said: “Customers are seeking out the quality and value of our own-brand ranges as they work to make their money go further, whether they are switching from branded products, between categories or cutting back on eating out.

“As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market.”

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Tesco remains the UK's biggest supermarket operator in terms of market share, by some way. Picture: Andrew Milligan/PA Wire

The interim results showed UK like-for-like retail sales edged 0.7 per cent higher, having fallen by 1.5 per cent in the retailer’s first quarter.

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Zoe Gillespie, investment manager at RBC Brewin Dolphin, said: “Tesco’s results are caught between the jaws of post-pandemic normalisation and the rising cost of living. Profits have taken a dip and are likely to be at the lower end of guidance this year, as the supermarket looks to align with customers and mitigate the impact of rising prices through a combination of initiatives, such as its Clubcard prices.”

Matt Britzman, equity analyst at investment platform Hargreaves Lansdown, noted: “Despite significant challenges, there’s plenty of positives to take away from today’s results and markets have looked favourably on results in early trading.

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“Tesco continues to generate significant free cash flow, with full-year guidance getting a boost and investors rewarded with an ongoing buyback scheme and increased interim dividend. Raising prices behind the wider market is helping to keep cash conscious shoppers coming back for more, albeit there are increasing signs shoppers are trading down from branded to own brand items.

“Tesco’s arguably been one of the standout businesses in the battle against low-cost outfits,” he added.

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