Tesco doubled pre-tax profits to more than £2bn last year but has warned on profits for this year as it faces a battle to “keep the cost of the weekly shop in check” amid soaring inflation driving up costs and squeezing household budgets.
Total revenues for the UK’s biggest supermarket, which proved to be a pandemic winner by taking a share from rivals and boosting online sales, rose by 6% to £61.3bn as pre-tax profits jumped from £1.1bn to £2.2bn in the year to the end of 26 February.
However, the company warned of “significant uncertainties” weighing on the business, including whether customer shopping behaviour would change as the nation moves out of the coronavirus pandemic, cost inflation, and investment to keep prices low versus budget operators, such as Aldi and Lidl.
On Wednesday, the Office for National Statistics revealed that inflation hit a three-decade high of 7% last month, and could reach a four-decade high of 10% by the end of the year.
Ken Murphy, the chief executive of Tesco, said: “Over the last year, we delivered a strong performance across the group, growing share in every part of our business.
“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.”
As a result of uncertainty in the market, Tesco broadened its forecast of profits for this year to between £2.4bn and £2.6bn – less than the £2.84bn predicted by analysts.
Tesco’s share price fell as much as 5% in early trading, making it the second-biggest faller in the FTSE 100.
Adjusted operating profits at the group’s core grocery business rose 35% year on year to £2.6bn and Tesco Bank returned to profit, making £176m. On an adjusted basis, stripping out exceptional charges such as restructuring and litigation costs, Tesco’s profits more than tripled year on year from £636m to £2.03bn.
Murphy said its surveys show customers are now looking closely at their budgets – households will this month be hit by the first bills incorporating a number of price rises including from energy, phone and TV companies – while shopping habits are changing since the easing of pandemic restrictions.
Trends such as eating out more, a return to the office and increased travel could be tempered by belt-tightening households trying to save money by working from home, eating in and cutting holiday budgets.
“Customers are looking at budgets and are already making trade-offs,” Murphy said. “We are trying to discern what behaviours are being driven by the lifting of restrictions, and what behaviours are starting to emerge as cost and energy price increases start to bite.”
He said Tesco was maintaining its competitive edge against discounters by offering a combination of Aldi price matching, Clubcard offers and Everyday Value pricing.
Murphy said Tesco had been “almost religious” in keeping the price of the 600 most popular shopping items highly competitive. “It has been many years since we have seen living costs rise at the rate they are today. We have been really working hard to hold back the effect of that inflation. Increase by a little less, and a little later than the market.”
Despite widespread reports of potential fresh produce shortages, Murphy said his sourcing teams were “not hearing or seeing any sign of that”. However, he said there were some problems with specific products – such as “patchy” availability of sunflower oil, of which Russia and Ukraine are major producers – and that Tesco was “already looking at alternative vegetable oil sources”.
Murphy said the online shopping boom peaked earlier in the pandemic when it accounted for 15.5% of Tesco’s total sales – online revenues fell 6.5% to £5.9bn last year at a 14% share of all sales – but that online shopping remained well up on the 9% share it represented before the coronavirus pandemic.
Tesco also benefited from a significant reduction in costs related to Covid-19 in the UK, falling from £892m in 2020 to £220m last year, although the supermarket said it continued to run up costs because of staff absences.
The strong results prompted Tesco to increase its dividend by 19.1% to 10.9p and launch a £750m share buyback.