Tesco sits at the top of the food chain but rivals are growing peckish

As the UK’s biggest supermarket, accounting for more than a quarter of our national food shop, Tesco will shine a spotlight on a rapidly changing grocery market with its annual financial results on Thursday.

With sales expected to rise almost 5% to just under £69bn, Tesco is back in the ascendant, gaining market share as household bills remained under pressure and shoppers looked for bargains.

Under chief executive Ken Murphy, the group has improved service and price competitiveness, using its size and strong balance sheet to soak up some of the effects of inflation and flexing its Clubcard loyalty scheme to fend off the threat from discounters Aldi and Lidl.

The group, which also has supermarkets in Ireland and central Europe, is likely to report underlying profits of £2.3bn, according to City analysts, up from just under £2.1bn last year.

Its new line of defence is the former Aldi UK boss, Matthew Barnes, who took over from Jason Tarry as head of Tesco’s UK business on 1 March. He is likely to get his first outing in front of City analysts on Thursday.

With years of discounter experience, he could have some thoughts on how Tesco can keep its edge. Its Clubcard Prices scheme, which offers special discounts to loyalty card members, has been widely copied, but Tesco also faces an expensive redesign of that scheme’s marketing material after it lost a legal battle with Lidl over the use of a yellow blob similar to the German discounter’s logo.

Meanwhile, the group’s impressive sales and profit figures may begin to prompt renewed questions about its power over the UK food market. As well as large supermarkets, it owns the One Stop convenience chain, Tesco Express, and the UK’s biggest grocery wholesaler, Booker, which gives it control of thousands of small Premier and Londis shops.

The UK’s competition watchdog is already looking at whether loyalty card discount schemes – including the Tesco one and Sainsbury’s Nectar Prices – are having a detrimental effect on the grocery market.

There have also been calls for the Competition and Markets Authority to take a new look at whether Tesco’s control of Booker could be detrimental to thousands of small rural businesses that have little choice but to use that wholesaler.

The UK grocery market is at an inflexion point. After more than a year of high inflation, the pace of food price rises is rapidly easing. As wage inflation has caught up with price rises, shoppers have begun putting more grocery items in their baskets and picking more premium products.

That could be good news for the likes of Tesco, Sainsbury’s and Marks & Spencer, all of which have been adding sales. It could also be good for the nascent turnaround happening at Morrisons and Waitrose. It may be less good news for some.

While inflation may have made it tricky to renegotiate deals with suppliers and keep a lid on costs and price rises in order to hang on to customers amid heavy competition, rising food prices at least guaranteed impressive- looking sales figures for most.

Now sales figures will begin to wilt, further exposing those businesses, including Asda, the Co-op and even Aldi, that are struggling to win over shoppers while they continue to battle rising costs and high interest rates.

“For those with falling volumes and rising costs it could be painful,” says Clive Black, an analyst at Shore Capital. “We expect sales numbers to be less strong for the foreseeable future than they have been for the last couple of years.”

Room for manoeuvre will be limited as inflation is unlikely to entirely disappear, given the near 10% rise in the legal minimum wage in the UK, higher business rates and persistent cost rises on some commodities, including wheat, cocoa and seed oils, as the war in Ukraine grinds on.

The ongoing issues in the Red Sea and a soggy start to the year in the UK are also likely to mean higher prices, and potential shortages of staples including potatoes as farmers struggle to harvest and plant crops.

Tesco’s scale may help insulate it from these problems – but it also makes it ripe for attack.


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