While Tesco delivered a steady set of first-quarter results, boss Ken Murphy is braced for worse to come this year as he outlined changing customer behaviour in response to soaring costs.

Tesco-trolley-in-aisle

Tesco was the only big-four grocer to increase market share in the first quarter of 2022

In a fortnight that has brought a welter of profit downgrades from the likes of Halfords and ProCook through to Asos due to slumping consumer demand and spiking inflation, the UK’s biggest retailer Tesco delivered a solid set of results for the first quarter of the year. 

While like-for-like sales dipped 1.5% in the core UK market, the grocery giant was the only one of the big four to increase market share in the period – up 11% year on year.

Sales were also up 9.9% on a three-year like-for-like basis compared with pre-pandemic trading. 

As a result, Tesco was able to ease the nerves of jittery investors by saying its full-year sales and profit guidance remain unchanged. 

Yet, for all its robust performance in the first quarter of the year, Murphy was cautious about the trading conditions facing the sector in the shorter term. 

While he would not comment on figures released by IGD yesterday that signalled food inflation could hit 15% over the summer, Murphy said inflation was worsening and changes in customer behaviour as a result were becoming more pronounced.

While insisting it was “early days yet”, he said Tesco would have a better view of customer response to the burgeoning cost-of-living crisis by the end of the first half, implying inflation will get worse before it gets better. 

Counting the pennies

In the first quarter, Tesco expanded its Aldi Price Match for more than 600 items and bolstered its Low Everyday Prices, with the overall distribution of such products rising by 19%. 

Murphy said the expanded value offer was a key reason why Tesco managed to grow its market share by 37 basis points at the expense of its big-four rivals in the period. 

Ken Murphy Tesco

Tesco boss Ken Murphy insisted the grocer would use all levers at its disposal to keep prices low

“We are seeing some early signs of customers trading down in those areas where we’ve seen significant cost price pressure, particularly the staples like bread and pasta,” said Murphy. 

“The good news is that we have fantastic value across all of those propositions. So we’ve been keeping the customer trip and mission as they have traded into our Tesco own-brand and Exclusively at Tesco labels”. 

While Murphy said the trading downshift was occurring now, he emphasised that it was only just beginning.

“The mix effect at the moment across the business is less than 1%,” he said. “So we’re not talking about dramatic shifts yet. This is really early days.” 

In terms of mitigating costs, Murphy said the ongoing war in Ukraine would continue to drive up the prices of everything from wheat to cooking oils and petrol over the year.

However, he insisted that Tesco would use all of the levers at its disposal to keep prices at the shelf edge as low as they could. 

“We’re going to be working with our suppliers to mitigate whatever costs we can, to improve our efficiency, to simplify our supply chain, to make sure that we’re passing through as little of that inflation as we can”

Ken Murphy, Tesco

“It’s really hard for us to judge how long this inflationary environment will last because it’s multi-dimensional and depends on volume demand. There are a lot of factors influencing inflation and cost-price increases,” he said. 

“But we’re doubling down on our commitment to provide fantastic value to customers. We’re going to be working incredibly closely with our suppliers to mitigate whatever costs we can, to improve our efficiency, to simplify our supply chain and our business to make sure that we’re passing through as little of that inflation as we possibly can.”

While Murphy said soaring inflation had created some “tensions” between Tesco and its supplier base, he said the grocer would continue to stick to its guns.

This same tension is being felt across the entire sector as retailers and suppliers decide who will bear how much of the inflationary burden in the weeks and months to come.

Normalising behaviour

Despite the changes in market conditions from the first quarter to the second, Murphy said that customer behaviour was in some ways normalising after more than two years of coronavirus-affected trading.

“What’s really happening is a normalisation of customer behaviour, in some respects. What we are seeing are higher frequency shopping trips. So there’s an elevation in the number of shopping trips and we are seeing basket sizes coming down a little bit. We have seen our convenience business getting even stronger.”

That was borne out by the numbers, which showed one-year like-for-like sales at large Tesco supermarkets dipped 0.7%, while its c-store sales’ jumped 6.2% – albeit against weak comparatives – as consumers returned to offices and city-centre locations. 

As people engaged in more frequent, in-store shops, Tesco’s online business suffered. Online sales dropped 14.5% on a like-for-like basis.

“Where increased costs are passed on, we want to ensure it’s a little bit less and a little bit later than our competitors”

John Allan, Tesco

As flagged yesterday by Tesco chair John Allan, softening demand, rising costs and strong comparables to the first quarter of last year in lockdown also hit Tesco general merchandise and fashion sales in the period.

Allan said general merchandise and clothes retailers were having “a very tough time” in the current environment, which will sound further warning bells for many category specialists heading into what is likely to be a make-or-break summer.

“We remain resolutely committed to value. And we know that staying competitive on price is the most important thing we can do for our customers at this time,” said Murphy.

“Where [increased costs] are passed on, we want to ensure it’s a little bit less and a little bit later than our competitors.”

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