Tesco increases profit forecast following shoppers’ spending spree

Tesco’s boss claimed that consumers were “in good shape” and began to buy more expensive products before Christmas. This led the country’s largest grocery store to raise its profit forecast.

Ken Murphy was upbeat about the consumer’s morale after its premium food line saw a surge in sales on Thursday, despite reports that painted a more negative picture of household sentiment.

The chief executive of the supermarket chain said that the company, which controls 27.8 percent of the market, tracks consumer confidence each week. He noted “stability” in the consumer’s sentiment, as well as a willingness to pay a bit more for a treat. He said: “While they may not be doing cartwheels in the halls, they’re in a reasonably good condition”, but warned there was still “a lot of uncertainty” in the world.

His comments contrasted with a sharp drop in consumer confidence that occurred last month in anticipation of an autumn budget. Recent surveys show that consumer confidence dropped after Sir Keir warned about the state of the public finances, and that tax increases were expected. Simon Roberts of Sainsbury’s UK, the second largest grocery store, predicted recently that the consumer confidence was unlikely to improve until the government announced its tax and expenditure plans in this month’s budget.

Tesco’s better-than expected performance in the first half led it to raise its forecast of annual retail adjusted operating profits, its preferred measure, to around £2.9 billion. It had previously set a target of “at least £2.8bn”.

Tesco shares rose 9p or 2.6% to 364p on the back of a bullish outlook. The company’s shares have increased by 35 percent in the last year. Over the same period, the FTSE 100 index has risen by 11 per cent. Operating profit for the company that also owns Booker Cash-and-Carry rose by 13 percent to £1.61 Billion in the six-month period ending August. This is up from £1.43 Billion over the same time last year.

The group’s sales grew by 3.5% over the same period, to £31.5billion. Like-for-likes rose by 2.9%. Murphy said Tesco is “in good shape” with volume growth driving strong financial performance, as the sales inflation has returned to “normalised levels”. Ken Murphy, Tesco’s boss, claimed that the retailer has seen “volume growth” delivering a strong financial performance

Tesco reduced prices by 9 percent on an average for more than 2,850 items during the first six months. The company stated that it would “continue to lower prices as quickly as possible for customers” as inflation continues to ease. The FTSE-100 retailer used schemes like Aldi Price Match, Clubcard Prices and Aldi Price Match to attract shoppers in the midst of the cost of living crises. It credited these for boosting market share and sales.

In recent months, it said that shoppers had begun to buy into its premium range. It reported that sales of Tesco Finest, its premium range, had increased by 15% compared to the same period in last year. Murphy called this a “real sign of a resilient consumer sector”.

Tesco stated that sales were driven more by volume than price. Retail like-for-likes were up 2.9% during the quarter, but were slightly lower than some analysts’ predictions of 3.3%. Murphy explained that this was due to “a little less inflation than expected”, which usually means lower price increases and ultimately is good for the customers. Analysts at Bernstein stated that Tesco’s latest trading update confirmed its position as “a strong and stable performer delivering margin improvements and a strong free cashflow”.

Murphy refused to comment on Labour’s budget plans or the overhaul of workers rights. He said, however, that he wanted to “make sure” that any legislation the government introduces has the intention of promoting productivity, growth, and protecting workers. The decline in tobacco consumption across the country continues to affect sales at Britain’s biggest cash and carry group.

Booker, a wholesaler owned and operated by Tesco, saw its like-for-like retail sales decline by 1.9% in the first six months of the year. The supermarket chain attributed this to a drop in tobacco sales.

Murphy stated that there has been a “pretty substantial drop in tobacco volumes on the market in general”.

Booker, he said, also sells vapes. He attributed this to the fact that people are smoking less cigarettes and switching over to them. He said those who still smoke were looking for cheaper duty-free packs when traveling abroad or purchasing through “other sources” such as the blackmarket.

The group that owns the Londis convenience store chain and Budgens said that their sales have plummeted since the introduction of rules that require cigarettes to be packaged in a standardised package with graphic warnings about the dangers associated with smoking.

Murphy responded to a question on Thursday about what an increase in tobacco duty would mean for Booker. “I don’t think it will have a dramatic impact on these trends, because they are already on a downward trend.” To be honest, I think that the government will simply do it.

Booker, the UK’s largest wholesaler of food and drinks, operates from over 200 locations. Tesco bought the group in 2017 for £3.7billion, promising to benefit both shoppers and independent retailers.

The Guardian reported earlier this year, that independent retailers, including many who also run the local postoffice, said a recent series of changes introduced by Booker added to pressures in a time where some villages were left with only one small shop or none at all.

Booker, they claimed, had cut the number of products available at certain sites by as much as 30 percent, as well removing favourites such as Yorkshire Tea, Rowntree’s sweets, and Colman’s mustard. They also reduced the availability of delivery. Murphy said Booker’s retail range was reduced by 200-300 lines, but that customer satisfaction was on the rise and Tesco “was doing a good job” for independent retailers.

Tesco will relaunch its F&F clothing line online next year, following what its boss called “strong” demand. This will be the first opportunity for customers to purchase clothes via the grocery store’s website after Tesco Direct was shut down in 2018. Since then, the line was only sold in a few Tesco stores, and until recently, on Next’s website. Murphy stated that the move is “in response very strong feedback from our customers who would like to be able to see what F&F has to offer online in a web-browser”.

The supermarket appears to be bucking the trend of supermarket clothing. Sainsbury’s announced this year it would replace some of the Tu Clothing space with food aisles in its stores after a year marked by declining fashion sales. Asda’s George clothing line saw a decrease of 3.9 percent on a comparable basis in the second quarter. This was partly due to its decision to not participate in major promotional activities across the fashion industry.

This is despite the demand for cheaper clothes, which has been a boon to fast-fashion retailers like Shein and Temu.

F&F was launched as Florence & Fred by Tesco in the UK and Ireland in 2001. The brand opened its first store in London in 2010. It expanded into stores in the early-mid 2010s before being integrated onto the Tesco Direct platform.

Tesco was operating two online businesses at the time: Tesco.com, which offers grocery home delivery since 2000, as well as Tesco Direct, a catalogue-style website for clothing and general merchandise, which launched in 2006. Tesco shut down the Direct platform in 2006, citing “no path to profitability” and high marketing costs.

Murphy stated that Tesco decided to relaunch F&F on the internet because “we have customer insight that tells us between 80-85 percent of clothing searches start online. We knew we needed to at least have our F&F range available and accessible through our website.” Second, the economics didn’t work with our traditional grocery model. But we were able to make it work through our marketplace.

Tesco launched its online marketplace in June. It is now integrated with the main platform online and Tesco App. Customers can access thousands of products by third-party brands such as Tefal Silentnight Tommee Tippee Charles Bentley. These products are listed with Tesco groceries but are delivered directly by the suppliers.