Tesco to take fight to discounters as profits rebound but inflation bites: reaction

Tesco, Britain’s biggest retailer, has revealed annual profits more than tripled, but warned retail earnings will come under pressure this year from soaring inflation and as shoppers return to pre-pandemic shopping habits.

The supermarket giant saw group pre-tax profits jump to £2.03 billion in the year to February 26, up from £636 million the previous year, thanks to rising sales and lower costs related to the pandemic.

It posted a 58 per cent jump in underlying operating profits to £2.8bn, with retail earnings up 34.9 per cent at £2.6bn.

The group said sales excluding fuel lifted 2.5 per cent to £54.8bn, with UK like-for-like growth of 0.4 per cent - up 8.2 per cent on a pre-pandemic two-year comparison.

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

Profits were helped as it saw Covid costs fall to £220m from £892m the previous year.

But it warned that retail operating profits are expected to fall this year, to between £2.4bn and £2.6bn as the group’s own costs are set to soar and it invests in prices to remain competitive amid rocketing food inflation. It also said customer behaviour is returning to more normal patterns as shoppers rely less on supermarket trips as the UK emerges from the pandemic.

Tesco is also extending its Aldi Price Match promotion to more product lines as it tackles the march of the discounters.

Chief executive Ken Murphy said: “Clearly, the external environment has become more challenging in recent months.

“Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check - working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs.”

Zoe Gillespie, investment manager at wealth firm Brewin Dolphin, said: “Tesco has delivered another strong set of results, with each part of the business performing well.

“The big uncertainty for Tesco, however, is inflation - which is the main reason behind the shares losing momentum since the start of the year. On that front, the supermarket has a tricky balancing act ahead between mitigating cost increases and protecting its customer base.”

Freetrade senior analyst Dan Lane noted: “The glut of Covid costs are behind Tesco now and profits are roaring back. Sales are clearly getting back to normal and the UK’s biggest chain looks to be doing all it can to welcome its audience back again.

“In all the punchy numbers investors might have missed the supermarket’s plans to keep Aldi at bay.

“Extending the Aldi Price Match promotion to 650 product lines is a crucial move, as inflation eats into what consumers can spend at the tills.

“This is the time when shoppers could easily switch to one of the German discounters in search of the cheapest alternatives out there and Tesco just can’t let that happen.”

Richard Hunter, head of markets at Interactive Investor, added: “Tesco is seeing its ambitious plans coming together, in another example of a company which used the pandemic to accelerate a corporate turnaround.”

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