Tesco missed market expectations for revenue growth in last year, but still managed to increase sales by 5.1% on a like-for-like basis. Profits sank as a result of lower margins due to the cost of living crisis.
Soaring rates of inflation and resultant wider cost of living crisis is a thorn in the side of major supermarkets as their customer’s spending power dwindles.
An over 2% rise in Tesco’s share price to 273p on Thursday reflects the extent economic concerns had already been factored into their shares. The selloff late last year took Tesco shares down to 200p.
While the top line displayed resilience, the impact of higher costs was clearly obvious in their operating profit. Profit before tax halved to $1bn from £2bn in FY 21/22.
Although total revenue rose, volumes fell and cost inflation eroded margins as Tesco wages a war of attrition against the discounters Aldi and Lidl. Adjusted operating profit fell 7.1% as Tesco’s average store worker wage rose to £11.02 per hour.
“Tesco has seen profits take a knock as inflation means struggling customers are picking up fewer items while prices soar. At the same time, the grocery giant is investing heavily in its customer care while times are so tough. While the group is doing what it can to keep prices low, it’s not lost on consumers that grocery inflation remains one of the most painful areas of overall rising costs at the moment,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
“That’s where we’ve seen the rise of the discounters, which although much smaller, have forced the main players to up their game. Aldi price matches and other similar campaigns are a stark reminder of how stiff competition is. By some trains of thinking, if you’re having to name your competitor, they’ve already won.”
Wholesaler Booker was a stand out performer for Tesco with a 12% increase in like-for-like sales. Tesco bank adjusted operating profit slipped 18% due to provisions for an uncertain economic outlook.
Tesco proposed a final dividend of 7.05p to total a full year dividend of 10.90p. This was in line with last year’s dividend.