Tesco chief executive Dave Lewis signed off his tenure by detailing a trading period “beyond imagination” as the coronavirus pandemic transformed food shopping patterns. We look at the implications for Tesco and the grocery market.

Dave Lewis

Source: Peter Searle

While Lewis has often bridled at the moniker ‘the man who saved Tesco’, the work that he and his team have done in the past three months could see him leave not just as a rescuer but also a revolutionary. 

Lewis said today that “over the past three months our industry has changed beyond imagination”.

No return to old norms as online growth soars

One of the biggest shifts has been the explosive growth of online shopping.

In Tesco’s first quarter, ecommerce sales leaped 49%, hitting a peak of more than 90% growth in May. As a percentage of Tesco’s sales in the first quarter, online accounted for 16% – up from around 9% in the fourth quarter of last year.

Prior to the pandemic, Tesco had the capacity to make about 600,000 home deliveries a week. In the first five weeks of the lockdown, it had more than doubled that to more than 1.3 million.

“To put online in context, last year it was £3.3bn worth of sales and we estimate, based on the fact its running each month at double what it was last year, that total sales will be £5.5bn,” said Lewis.

Tesco managed all of this on relatively shoestring capital expenditure of £4m, most of which was spent on new staff.

The question, even during the worst weeks of the crisis, was what Tesco would do with this extra home delivery capacity post-pandemic. While Lewis said the margins of Tesco’s home delivery model had improved, they are diluted compared to those when people go into stores.

However, the boom in online represented a “shift in how people shop with us” that would continue, Lewis cited. He also noted that many of the 590,000 vulnerable customers Tesco had served during the pandemic “were new to Tesco” and would likely continue to be customers as lockdown unwinds.

  • Tesco was able to add massive online capacity at low cost, because of a model which can continue to adapt as necessary. The online market will not be shrinking. All retailers need to be sure they can similarly flex their digital operations, and that they have the most cost-efficient model possible. After all, Tesco showed to be more agile than pureplay Ocado.

Read more: Deep dive - Has grocery retail changed forever? 

Coronavirus brought unprecedented demand for grocery retailers, but it’s also dramatically changed how we buy and consume food. Retail Week speaks to bosses from Sainsbury’s, the Co-op, Ocado, Costcutter, and Gousto to determine what new shopping behaviours and trends will be here to stay once the pandemic subsides.

All out price war

One of the worst recessions in centuries looms, if it is not already beginning to bite, and Lewis was keen to highlight the work that Tesco had done so that it never again falls prey to discounter Aldi’s price prowess.

He said that Tesco’s Aldi Price Match now extends to about 500 own-brand and branded lines and that its focus more generally on value meant customers were “switching from Aldi to Tesco for the first time in a decade”.

“Customers tell us they see through Aldi’s misleading price comparison of branded goods at the big four versus Aldi own label,” he maintained.

“When we started six years ago, our price position versus the average big four was 7% more expensive. We’re now very much comparable. We will continue to ensure the best value in the marketplace is in Tesco.”

“The opportunity for the market to reset and keep everyday prices low rather than bring prices up and then invest more in promotions, which has been the model in the market historically, [now] would be a good time to reconsider that model”

As lockdown eases, rather than look to raise prices back to pre-coronavirus levels on everyday items and invest the difference into ramping up promotions, Tesco is looking to cut back on promotions and focus on keeping core lines affordable.

“The opportunity for the market to reset and keep everyday prices low rather than bring prices up and then invest more in promotions, which has been the model in the market historically, [now] would be a good time to reconsider that model,” Lewis said.

  • Tesco intends to keep its foot on the price pedal, so rival grocers should expect no let-up in the need to be highly price-competitive. In the event of a recession,  which many think likely, price credentials will come to the fore once again in a way likely to shape shopper behaviour. Every food retailer will need to be confident in their price armoury, or be able to justify premium prices in a way that consumers will accept.

Higher costs from here on in

Lewis was frank about the toll the pandemic had taken on Tesco staff.

“At our peak we had 52,000 colleagues absent,” he said. “By the end of the quarter this was reduced to 32,000 and, while we maintain a level of absence, this continues to fall.”

Over the period, Tesco doubled covering shifts, both to replace ill staff and cover regular absence. He acknowledged that this would continue even as lockdown begins to ease, as the virus continues to persist in the population.  

To have the staffing resources to cover all these extra shifts, Tesco has bought on some 47,000-temporary staff. Lewis said that was piling on cost pressure.

He predicted that the cost to Tesco over the period of the lockdown was at the upper £925m range, as pulled out in its coronavirus scenarios report in April. As a result, despite the uptick in sales in this quarter and into the next, Lewis predicted profits would be flat even this year.

Despite the increased cost burden however, Lewis claimed that a number of temporary roles created during the pandemic could wind up being made permanent – particularly in online grocery fulfilment.

”There will also be some significant new jobs created from this. The 12,000 new staff picking grocery home shopping is reflective of a number that we think will stay beyond the pandemic,” he said. “When we come out of this, and we don’t know when that will be, I expect net we’ll have more staff than when we started.”

  • For all retailers, not just Tesco, costs are unlikely to fall back for the foreseeable future. Retailers need to be sure they are operating as efficiently as possible to preserve profits, never mid grow them.

For a man who in his own words “was not a retailer” when he joined Tesco, Lewis has overseen radical change at the UK’s biggest grocer. As it and the UK move into an uncertain future living with the virus, the business seems to be in a much stronger position in its most important markets.