Grocers crash as Tesco warns cost of living crisis will hit profits

Supermarket shares crashed yesterday as Tesco warned the cost of living crisis would knock its profits in the year ahead.

The UK’s biggest grocer sent waves through the industry as it said soaring inflation, a return to pre-pandemic shopping habits and ferocious price wars would hit margins.

The supermarket reported a trebling of profits for last year at £2.03billion, following a reduction of costs linked to Covid.

Fight: Tesco boss Ken Murphy said soaring inflation, a return to pre-pandemic shopping habits and ferocious price wars would hit margins

But it was the guidance for the year ahead that caught investors off guard as Tesco cautioned profits in 2022 will be between £2.4billion and £2.6billion – well below forecasts of £2.8billion.

The bleak outlook sent shares in all the listed grocery retailers tumbling and comes just a week after Morrisons, which is now owned by private equity company Clayton, Dubilier & Rice, cautioned that its sales and profits would be affected by geopolitical and inflationary pressures.

Tesco shares fell 2 per cent, or 5.4p, to 265.2p yesterday and Sainsbury’s shares lost 2.5 per cent, or 6p, to close at 238.6p.

At the same time Marks and Spencer shares tumbled by 2.1 per cent, or 3.25p, to 150.1p and Ocado’s stock was down by 2.6 per cent, or 31p, to 1153.5p.

Shore Capital retail analyst Clive Black downgraded his recommendation for Tesco from ‘buy’ to ‘hold’, and added that if the supermarket catches a cold he would expect others to catch ‘influenza’.

The update comes as shoppers face a cost of living squeeze, with the growth in wages failing to keep up with inflation, and energy bills soaring.

Tesco 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.’

Tesco is the largest supermarket in the UK, with a 27.4 per cent market share, 4,000 stores in the UK and Ireland and more than 360,000 staff.

It has been using its enormous scale to keep prices down for its customers. The retailer said that prices last year decreased 0.6 per cent and it has vowed to keep them low for the year ahead. Murphy added: ‘We have been working hard to hold back the effect of that inflation.

‘And so our policy and our strategy has been to increase prices by a little bit less and a little bit later than the market and do our best to manage the impact of those price pressures on our customers.’

But the supermarket giant has a fight on its hands as it is also facing fierce competition from the German discount chains Lidl and Aldi – both of which have promised to be the cheapest grocers.

Murphy said that his company will match Aldi on 650 products and is also offering low prices on thousands of household and beauty items to stop its customers from going to ‘Home Bargains or B&M’.

AJ Bell financial analyst Danni Hewson said yesterday: ‘The supermarket has been working incredibly hard on a plan to fight off competition from discounters Aldi and Lidl.

‘Tesco has been working effortlessly to cut prices and it also participated in more promotions to encourage people to shop at its stores.

‘The coming months will be challenging for Tesco as it faces higher cost inflation and a potential shift in how consumers spend their money.

‘There is a real risk that cash-strapped families will cut back on their shopping and if this trend does play out as expected, it won’t just be Tesco feeling the pain.’