Tesco expected a “strong recovery” in profits in the current year after almost £900m of additional costs related to the Covid-19 pandemic held back its performance.
The UK’s biggest food retailer said only about a quarter of those costs would persist in its current financial year. It expected profits to remain strong in its online operation, and recover in its banking and wholesale divisions.
“We’re going to keep focused on the basics, keep things simple, stay competitive on price and drive greater quality perception, beyond what has already been achieved,” said Ken Murphy, chief executive, who joined the group last year.
All supermarkets have benefited during the pandemic from the closure of pubs and restaurants and the diversion of spending to dining at home. But Murphy said the degree of this transfer varied by country, from very substantial in Ireland to much less meaningful in central and eastern Europe.
The sales uplift was offset by the costs of staff absence, expanding online operations and adapting stores and distribution centres to social distancing and increased hygiene requirements.
In the group’s core UK and Ireland operation, operating profit fell 13 per cent to £1.87bn in the year to February 27 despite an 8 per cent rise in sales, to £48.8bn.
Murphy said the online business, which doubled its capacity in just a few months, had dramatically improved profitability. “Higher volumes, bigger basket sizes and better van utilisation rates have definitely been factors.”
He expected the share of online to fall back but not to pre-pandemic levels and said productivity improvements, such as restoring in-store pick rates that were deliberately reduced to allow for social distancing, would help mitigate lower volumes.
A pledge last year to match the prices at discounter Aldi on about 500 lines was key to reframing customers’ price perceptions, Murphy said. Tesco has reduced the share of promotions in its ranges in favour of an “everyday low price” strategy.
“Five or six years ago we were quite adrift on value,” said the chief executive. “Now customers see they can rely on our value proposition rather than it being a bit of a hokey cokey.”
Tesco will also continue to roll out preferential pricing for Clubcard members, noting that four-fifths of shoppers in larger stores are now signed up to the scheme and pay less on about 3,000 product lines.
Group sales in the year to February, adjusted to remove the benefit of an additional trading week, rose 7 per cent to £53.4bn, below the £58.4bn average of analyst forecasts compiled by Tesco.
Operating profit was £1.82bn, which was higher than analysts had expected but down 28 per cent on last year due to coronavirus-related costs, a £175m loss at the banking unit and a 30 per cent fall in profit at its eastern European operations.
The figures do not include the Asian or Polish businesses, both of which were sold during the year.
The dividend was held at 9.15p a share. There was no mention of a share buyback, which some had been hoping for, but the group recommitted itself to “maintaining capital discipline and returning excess capital to shareholders”.
Shares in Tesco were down more than 2 per cent in early trade on Wednesday, and have made little sustained headway in the past five years.
Analysts at UBS said the guidance for 2022 looked conservative, but that a profit recovery should strengthen the group’s balance sheet to the point where it could support enhanced returns of cash to shareholders.