If there was a triumphant tone to Ken Murphy’s presentation to journalists this morning, it wasn’t because Tesco delivered soaring sales or enjoyed a dramatic leap in market share.
And yet investors lapped up the half-year results, after the grocery giant lifted its annual profits outlook and pledged to give even more cash back to shareholders. As a result, Tesco shot straight to the top of the FTSE 100 and shares surged 6% to their highest level in 15 years (see graph, below).
In reality though, the latest set of results from the UK’s biggest supermarket were more of a mixed picture, and while Tesco’s CEO called the results “strong”, scratching beneath the surface revealed a tightening, more competitive food retail market.
The contrast is telling. In a grocery market where growth is increasingly hard won, Tesco is demonstrating it has more tricks up its sleeve. Strong profitability, disciplined cost control, incremental sales from new businesses such as Whoosh and retail media, and the continued appeal of the Finest range have convinced investors that Murphy’s strategy remains firmly on track.
Perhaps more importantly, Tesco appears vindicated in one of its most controversial positions of recent months: its insistence that food inflation would remain under control.
The financials
Tesco lifted the bottom end of its forecasts rather than a full upgrade, with the group now expecting profits of between £3.15bn and £3.3bn, compared with a previous guide of £3bn to £3.3bn. A marked dip in like-for-likes saw sales growth slow to 1.5% in the first half, down from 4.9% a year earlier, while Q2 like-for-like sales growth of 1.3% was the retailer’s weakest since 2022.
Market share improvement was also on a downwards trajectory, as Tesco struggled to compete with the gains it made last year when M&S and Co-op were hit with cyberattacks.
GlobalData analyst Eleanor Simpson-Gould said Tesco’s bold moves signalled confidence in the profit growth already secured, but showed limited visibility on demand and competition for the rest of the financial year.
Profits in the 26 weeks to 29 August beat analyst expectations, rising 6.5% to £1.8bn thanks to to ongoing cost discipline and aforementioned stellar growth from new avenues.
Tesco also showed off the strength of its balance sheet by increasing the share buyback programme for the current year from £750m to £950m.
Simpson-Gould added the results were mixed. “Profits are rising, but customers are holding back on spending,” she said. “As the UK’s largest grocer, Tesco is a bellwether for the wider market, and H1 group sales growth slowing to 2% from 5.1% last year points to a broader drag on spending. This slower growth leaves little room once price inflation is accounted for, raising the prospect of volume declines across the market.”
Dan Coatsworth of AJ Bell was more upbeat and said there was “a lot to like” about Tesco’s results, including new product launches, more personalised offers and meal planning assistants to help keep shoppers interested.
But he warned: “When it costs more to fill up the car, to do the weekly food shop, and to pay for other essentials, the natural response from shoppers is to make cutbacks. This suggests that trading in the run-up to Christmas could be more challenging for the likes of Tesco.”
Food inflation is ‘under control’
The figures Murphy will be most relieved about are food inflation, at least for now. With the latest ONS figure sitting at 1.3%, it is, as he pointed out, “dramatically lower” than the forecasts made by bodies such as the FDF in the spring, when Donald Trump’s war in the Middle East was sending early shockwaves through global supply chains.
“I’m particularly pleased that when people were talking about high inflation coming down the track in April, we said we didn’t see it and thought inflation on food was under control, and that’s proven to be true,” said Murphy.
The question is whether that spells bad news for suppliers, many of whom have already found Tesco to be something of a brick wall when trying to negotiate cost price increases this year.
Murphy insists Tesco can keep inflation down while still treating suppliers fairly.
“We’ve always been very clear with suppliers that we will absolutely sit down and talk to them about real cost price pressures they’re feeling in their business and, where it’s justified, we will pass it through,” he told The Grocer.
“But where it’s not justified, we won’t, because we have a duty to customers as well as to suppliers.
“We’ve been very clear and consistent about that.”
Murphy is far too canny to predict where inflation will be by Christmas. But the intense competitiveness of the UK grocery market, coupled with Tesco’s determination to keep prices down, provides a strong indication of the direction of travel. That may be good news for shoppers, but it is likely to mean more tough conversations ahead for suppliers trying to pass on rising costs.
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