Tesco boss says food inflation will continue to ease as retailer’s profits soar

Tesco profits continue to beat expectations after inflation eased in the first half and bosses eye further falls in cost pressure in the months ahead.   

The supermarket group, which secured sales of £34billion in the six months to 26 August, said on Wednesday it would ‘continue to lower prices wherever we can’.

Tesco upgraded its annual profit forecast after shoppers snapped up more items across the chain’s Finest ranges and the group expanded its market share at the expense of ‘premium’ retailers. 

Falling food inflation: Tesco boss Ken Murphy said food inflation fell in the first half and will fall further in the coming months

Falling food inflation: Tesco boss Ken Murphy said food inflation fell in the first half and will fall further in the coming months 

Tesco, which has a 27 per cent share of the UK’s grocery market, said its overall price rises are lower than headline rates.

That has helped drive market share, the group said, and it now expects 2023/24 retail adjusted operating profit to be between £2.6billion and £2.7billion. It had previously forecast at around £2.5billion.      

Ken Murphy, the group’s chief executive, said: ‘We know how challenging it is for many households across the country, as they continue to grapple with ongoing cost of living pressures. 

‘We are committed to doing everything we can to drive down food bills and Tesco is now consistently the cheapest full-line grocer.’

He added the group’s investment to keep prices lower had contributed to ‘market share gains in store and online…at both ends of the basket’, with shoppers ‘voting with their feet as they switch from premium retailers to Tesco’. 

Murphy said: ‘Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year. 

‘We are in a strong position to keep investing for customers, and will continue to lower prices wherever we can – doing everything in our power to make sure customers can have a fantastic, affordable Christmas by shopping at Tesco.’ 

The group’s adjusted operating profit for the first half rose by 13.9 per cent to around £1.5billion in the first half. 

Total revenue, excluding fuel, came in at over £34billion for the period, with UK like-for-like sales were up 8.7 per cent.

Statutory profits after tax grew to £929million, an increase on last year’s £252million, though this was hit by a £579million impairment charge which dragged the number lower. 

UK food prices fell in September for the first time in more than two years in month-on-month terms as the annual rate of food price inflation fell for a fifth month in a row to 9.9 per cent, helping to underpin an improvement in consumer confidence.

Strong results: Tesco upped its annual forecasts amid strong first half results

Strong results: Tesco upped its annual forecasts amid strong first half results 

Tesco, like most supermarkets, has reduced the prices of food staples, such as milk, pasta and vegetable oils, in recent months as commodity and other input costs have eased. 

It competes with fast-growing German discounters like Aldi by matching prices on key items.

Tesco has also benefited from consumers entertaining at home rather than dining out, and from shoppers switching to it from more expensive grocers.

The group, said: ‘Prices cut on c.2,500 products by the end of the half, from bread to broccoli, with average saving of c.12 per cent. Clubcard Prices on over 8,000 products across the store, saving customers up to c.£390 per year.’

Tesco shares rose on Wednesday and were up 4.08 per cent or 10.60p to 270.20p this afternoon, having risen over 28 per cent in the past year. 

On investor returns, the group said: ‘We continue to see the buyback programme as an ongoing and critical driver of shareholder returns, reflecting the strength of our balance sheet and our confidence in delivering strong future cash flows.’ 

The group said it remains on track to make £600million worth of savings by its year end. 

Richard Hunter, head of markets at Interactive Investor, said: ‘Tesco is still the one to beat as it relentlessly delivers value to customers and shareholders alike.

‘Its drive on lowering prices for customers is enabled by its sheer scale and strength, falling food inflation, and a significant cost reduction. In turn, this creates something of a virtuous circle, with more customers attracted by the likes of the group’s Aldi Price Match, Low Everyday Prices and Clubcard Prices.’

He added: ‘The shares have also responded, despite a more pedestrian showing over recent months. Over the last year, the price has risen by 24 per cent, as compared to a gain of 5.4 per cent for the wider FTSE100, with appetite for the group’s offerings apparently undiminished for investors as well as consumers. 

‘As such, there should be little to trouble the group’s longstanding position as the preferred play in the sector, with the market consensus of the shares remaining at a strong buy.’

Sue Davies, head of Which? food policy, said: ‘As many consumers still struggle to put food on the table, these results show that some supermarkets have done relatively well during the cost of living crisis. 

‘While we all want to see British businesses do well, it’s clear they haven’t been feeling the pain in the way their customers have.’

Richard Lim, chief executive at Retail Economics, said: ‘These results are mightily impressive. Their relentless focus on value has delivered strong growth while the significant bounce back in profitability will be a cause of attention.’

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