Tesco braces for post-Christmas hangover with more deals

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By James Davey

LONDON (Reuters) -Britain's biggest retailer Tesco (OTC:TSCDY) said it would focus on offering customers better value deals in January as it does not believe inflation has peaked, preparing for a tough 2023 after shoppers defied the cost of living crisis and spent big at Christmas.

Trading updates show Britons did not hold back in December, with families hosting larger Christmas gatherings after two years of pandemic restrictions and treating themselves at home rather than going out to bars and restaurants to save cash.

"You could see people celebrating but in a responsible way, that I think was the theme at Christmas," Tesco Chief Executive Ken Murphy told reporters.

"They were managing their spend, they spread that spend a little bit and they bought better value products."

For Tesco that led to a better-than-expected 4.3% rise in underlying UK sales in the quarter to Nov. 26, and a 7.2% rise in the six weeks to Jan. 7, making it one of the sector's stronger performers, along with rival Sainsbury's and discounters Aldi and Lidl.

“[Tesco was] clearly a winner competitively over Christmas…and so the virtuous circle of scale benefits being reinvested in price to weaken smaller competitors and gain share can continue,” one top 20 Tesco shareholder told Reuters.

But the sector is now braced for a tough year, with surging energy and property costs and higher taxes squeezing consumers' budgets, leaving their confidence close to record lows.

"We are more focused this January on value because we think that's what's important to customers," said Murphy.

But he saw reasons for some optimism.

"Customers are weathering the storm, we're in a full employment market, I think the sense is that maybe the recession will be a little shallower than maybe people were thinking," he said.

Asked about inflation, running at 10.7% in November, he said: "We're not sure it's peaked just yet. We would hope that by the middle of the year it will have peaked and then we will see it come down the other side."

Industry data has shown the grocery sector as a whole delivered record festive sales, albeit growth was driven by price inflation rather than increased volumes.

Tesco, with a 27.5% share of Britain's grocery market, said it had good momentum going into 2023 and expected to "maintain our competitiveness and deliver a strong performance relative to the market despite the challenging conditions ahead".

PRICING

Tesco has benefited from a scheme to price-match Aldi on over 600 products and the popularity of its "Clubcard Prices" loyalty programme that offers discounts.

Tesco, like Sainsbury's, is absorbing some of its cost inflation rather than passing it all on to consumers.

Analysts welcomed the solid trading but Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said aggressive pricing could hurt profit margins.

"The tug of war between pricing and volumes is clearly producing a good result, which is why profit expectations have been reiterated, but it's still hardly an ideal state of affairs for the big names in industry," she said.

Tesco kept its forecast for 2022-23 retail adjusted operating profit of 2.4-2.5 billion pounds ($2.9-$3.0 billion), down from 2.65 billion pounds in 2021-22.

It expects retail free cash flow of at least 1.8 billion pounds and profit from Tesco Bank of 120-160 million pounds.

Shares in Tesco have fallen 16% over the last year, but are up 8% over the last month. They were down 0.5% in morning trading.