Tesco is taking on discounters Aldi and Lidl in a price war as the cost of living crisis drives consumers to seek out better value products.
This was reflected in a growing revenue but lower gross and operating profit as Tesco sells an increasing amount of budget items.
Statutory revenue including fuel for the 26 weeks to 27th August was £32,456m, up from £30,416m in the same period a year prior.
However, despite group revenue growing 6.7%, gross profit fell to £1,723m from £2,448m a year prior.
The biggest impact on gross profit was an impairment charge caused by higher discounts. Statutory operating profits fell 43.6% to £736m.
Tesco have taken discounters Aldi and Lidl head-on with Low Everyday Prices and Clubcard Prices and is well placed to maintain their market share, but the retailer will see their margins suffer as a result.
“Tesco is in a better position to face competition from discounters. Our experts say Tesco has strong pricing power, a sufficiently wide range of products for customers to trade down in the store, and a big advantage in its Clubcard loyalty scheme,” said Orwa Mohamad, a Consumer Sector Analyst at Third Bridge.
“Aldi and Lidl may be gaining market share but this is mainly from Morrisons and Sainsbury’s as savvy shoppers hunt for bargains in the cost-of-living crisis.”
As well as revealing damaging impairments charges in their interims, Tesco also suggested the outlook was becoming even tougher as the cost of living crisis and higher interest rates further squeezed spending. Stopping short of an all out profit warning, Tesco said they saw profits towards the lower end of their previous retail operating profit guidance of between £2.4bn and £2.5bn.
“The uncertainty is palpable in the company’s outlook comments and inevitably this will make the market rather nervous,” said AJ Bell investment director, Russ Mould.
“On the plus side, Tesco is entering a difficult period with a decent market position and solid balance sheet.”
“However, it is hard to see the coming months as anything other than extremely difficult, with cost inflation affected not only by higher energy and labour costs but also the cost of importing goods from overseas thanks to lower sterling.”