Tesco’s interim results today gave new boss Ken Murphy his first opportunity to address the City and experience the scrutiny that comes with being chief executive of Britain’s biggest retailer. 

  • Despite Covid restrictions likely be in place for Christmas, “strong” Halloween sales give Tesco hope for bumper festive period
  • Online grocery sales accounted for between 15% and 16% in Tesco’s first half and Murphy believes shift is “here to stay”
  • Tesco prepared for any Brexit eventuality and remain ”committed to providing customers with value, whatever the circumstances”
  • No plans for international sales or expansion and banking arm to rebound from Covid-related issues

The former Walgreens Boots Alliance executive joins the supermarket giant at a time when its core food business is flying. Pre-tax profits surged 28% during the 26 weeks to August 29, as group sales climbed 6.8% to £26.7bn.

The numbers encapsulate the scale of the turnaround overseen by Murphy’s predecessor, Dave Lewis – and the business the Irishman inherits is in a very different place to the one Lewis was parachuted into six years ago. 

As Shore Capital analyst Clive Black notes: Lewis “faced into a morass of internal strife” when he took the reins with sales shrinking and a financial crisis to overcome. 

With Tesco now on a much firmer footing, the biggest challenges facing Murphy are external ones – a global pandemic, a recession and Brexit will all need to be navigated. 

Murphy kept his strategic cards close to his chest, having only been in the business a week, but has already pinpointed several “opportunities and challenges” that will face him as Tesco boss.

He insists his plans will be “less about me making my mark and much more about delivering for customers”.

What are the key priorities that will be at the top of Murphy’s to-do list? 

1. The Christmas question

The biggest question facing retail at the moment is how coronavirus restrictions will affect Christmas trading. 

Tesco christmas bigger

Tesco’s festive season recruitment drive is on a similar scale to previous years

With restrictions around socialising in large groups or with other households likely to remain in place over the festive season, grocers will be concerned about how things will pan out. Planning for Christmas 2020 ranges would have begun in January, if not earlier, long before the pandemic took hold in the UK. But will such products sell as strongly as they have in previous years?   

Chief financial officer Alan Stewart stresses that Tesco’s planning has not fundamentally changed amid the health emergency because it had already banked on consumers having smaller gatherings.

“Smaller Christmas celebrations have been a trend for some time,” he says. “This Christmas is looking like no other in terms of some of the constraints that people will have, but I have no doubt that customers will find some way of enjoying Christmas.”

Murphy also remains upbeat, drawing on the “strong” sales Tesco has registered so far in Halloween categories as evidence that people will look to enjoy such occasions despite the government’s measures.

“We had a conversation about Halloween a few weeks ago and people were worried about that being cancelled too – but you try telling a 10-year-old that Halloween is cancelled,” he says. “We’ve seen quite strong Halloween-related sales and we’re convinced that we will have as good a Christmas as possible in the circumstances. I think people will be particularly keen to celebrate Christmas this year.”  

Tesco has already begun recruiting more than 11,000 temporary staff to cope with that anticipated festive demand. 

Stewart says the recruitment drive is on a similar scale to previous years but suggests a higher proportion of those new staff could be focused on picking and packing online deliveries from stores as ecommerce sales continue their rapid growth trajectory.  

2. Ecommerce forever

Online grocery sales have exploded since March – and Tesco has captured the biggest slice of this burgeoning market. 

Just five weeks after the UK was put into lockdown on March 23, Tesco doubled the number of online delivery slots it offered from 600,000 to 1.2 million. It has since grown that further still to 1.5 million. 

Murphy says online accounted for between 15% and 16% of Tesco’s total sales during its first half. As ecommerce sales grow to account for such a chunk of revenues, operating the division at a healthy margin becomes increasingly important – something that has presented grocers with a headache for a number of years. 

“Tesco has had the benefit of having to prepare for the potential of a no-deal Brexit on at least one occasion in the past. We’ve had a couple of dry runs at this”

Ken Murphy, Tesco

But Murphy says the increase in demand for home deliveries has helped to make online more profitable for Tesco.

“The profitability of online has definitely improved,” he says. “The average basket size has increased substantially. Van utilisation has also improved dramatically. As we’ve grown the number of slots, almost a third of those are now click-and-collect slots, which also improves the economics of dotcom.” 

Murphy believes the consumer shift to online during the pandemic is “here to stay” and would “top out” at around 20% of Tesco’s sales.

To capitalise on that, Murphy is keen to rapidly roll out Tesco’s new urban fulfilment centres – mini-warehouses located alongside some of its largest supermarkets – the first of which opened in West Bromwich earlier this year. A further two are due to open by the end of 2020, with a further 23 planned over the next two years. 

Murphy believes adding “an element of automation” to Tesco’s existing in-store picking capabilities within its biggest sheds could be “game changers” for the business. He hints that the move could eventually allow it to compete with Ocado’s Zoom same-day delivery proposition, fulfilled from what the online grocer calls its micro-customer fulfilment centres.  

“The key is the ability for us to capture an order and process it in a very short space of time,” Murphy explains. “That opens up the possibility of more immediate demand fulfilment and same-day fulfilment, which we think will expand the number of shopping missions that we’re relevant for.”

3. Once more unto the Brexit breach

Tesco’s immediate focus in the first half of its financial year has been on serving customers during the coronavirus crisis, but an issue looming ever-closer is the UK’s severance from the EU – and the growing possibility of food availability issues and price increases in the event of no deal. 

Tesco Clubcard

Tesco will continue to focus on value through its Clubcard Prices

Murphy remains philosophical about a potential cliff-edge Brexit, pointing out that Tesco has previous experience of planning for such an eventuality. 

“Tesco has had the benefit of having to prepare for the potential of a no-deal Brexit on at least one occasion in the past. We’ve had a couple of dry runs at this,” he says. “We’re prepared for all the various different scenarios that may emerge.”

Murphy stresses that, regardless of whatever Brexit deal may or may not be struck, the grocer will retain its commitment to delivering value for its customers. 

“From our Aldi Price Match and Clubcard Prices, we’re committed to providing customers with value, whatever the circumstances,” he says.

“Particularly if we head into a recession and times get tough, we’ll be even more focused on value and that won’t change, regardless of what happens with Brexit.”

As Stewart points out, Tesco has invested heavily in price over the past few years, slashing everyday prices and scaling back on promotional participation which, he says, fell from 30% to 22% year-on-year.  

Murphy admits that striking the right balance between keeping suppliers and customers happy can be tricky, but reiterates his determination to keep Tesco’s prices competitive

He adds: “We will continue to look for long term partnerships with suppliers as we continue to seek to innovate for customers but, also, we must be sharp on value and that can’t be allowed to change over time.”

4. Maintaining momentum

Murphy has experienced a “whirlwind” first week at Welwyn Garden City and says his first impressions are of a business whose “house is in order”. With that in mind, he believes his main role, for now, is to keep a steady hand on the tiller. 

“As far as I’m concerned, my job is to maintain momentum in the business and keep us focused on delivering a brilliant Christmas,” Murphy says.

Tesco built such momentum under Lewis through a concerted fightback against the discounters, Aldi and Lidl, as investments in price and quality won shoppers back. 

The grocer’s Aldi Price Match scheme has been expanded to more 500 branded and own-label lines and is set to grow further. Tesco says the initiative helped it achieve “switching gains from Aldi for the first time in a decade”.

“The bank has been a very strong performer for a number of years and we believe once this crisis has passed, it will continue to do so in the future”

Ken Murphy, Tesco

Part of that, however, has been driven by the pandemic. An increasing number of customers have favoured larger supermarkets where they could get everything they required in one shop – something that is not always possible at Aldi or Lidl. 

Murphy’s task now will be to keep hold of those new customers – he sees Aldi Price Match and its Clubcard loyalty scheme as vital weapons in his armoury as he goes into that battle. 

“I was kept fully in the loop in terms of the push to move to everyday low pricing and Aldi Price Match and I’m a big supporter of that move. I believe it’s the right thing for customers,” Murphy says. 

Clubcard members are currently benefiting from Clubcard Prices on around 2,000 lines, while members of Tesco’s £7.99-a-month Clubcard Plus subscription service get 10% off two ‘big shops’ a month in-store. This has led to “a basket uplift 300% higher than our original expectations”, according to Stewart.

Such work to drive loyalty by enhancing Tesco’s reputation for price and quality will remain central under Murphy. “I see the Tesco brand as being absolutely central to driving the business forward,” he says, calling it the “promise between the business and its customers”.

5. Hungary no more?

Tesco retreated from a number of markets and categories under Lewis, selling its Homeplus South Korean business, Kipa in Turkey, as well as non-core operations such as the Tesco Direct website, Dobbies Garden Centres and the Giraffe restaurant chain. 

Tesco Lotus Thailand

Tesco exited international markets under Dave Lewis

The grocer is currently in the process of selling its Thai, Malaysian and Polish businesses as it refocuses further still on its core UK market. The £8.2bn disposal of the Southeast Asian division should be complete at the end of the calendar year, with the £181m sale of its Polish arm expected to go through next spring. 

But Murphy has decisions to make around whether to offload even more of Tesco’s non-core divisions.   

The supermarket giant still has a headache in Central Europe with its underperforming businesses in Hungary and the Czech Republic. 

Despite right-sizing its store estate and simplifying ranges in those markets, Tesco’s Central European arm saw a 23.4% drop in operating profits to £59m during the six months to August 29, after like-for-like sales slipped 0.9%. 

Murphy insists, however, there are no immediate plans for further international retrenchments, blaming the profit dip on the introduction of a new sales tax in Hungary. 

Similar questions have been raised about the future of Tesco’s banking arm, which also experienced a torrid first half – Stewart says it expects to deliver an operating loss of between £175m and £200m in the current fiscal year. 

Murphy blames its travails almost entirely on the coronavirus crisis and says he has “no plans to divest the bank”. He says: “The bank has been a very strong performer for a number of years and we believe that once this crisis has passed, it will continue to do so in the future.”

In the short term, Tesco’s new boss is focusing on ensuring it is business as usual for Britain’s biggest grocer. Any thoughts of building his own legacy and stepping out from the shadow of the “man who saved Tesco” are on hold. For now, at least.