Tesco has said inflationary pressures in the UK grocery sector have “lessened substantially” as it announced plans to make £500m in efficiency savings in the year ahead.
The country’s biggest supermarket chain revealed pre-tax profits had risen to £2.3bn – the highest in more than a decade – after a 159% bounceback from the previous year when it incurred high impairment charges on stores.
Sales rose 7.4% to almost £61.5bn in the year to 24 February, led by strong expansion online and in large stores, although the pace of growth was behind the level of inflation for most of last year.
Shares in Tesco gained more than 5% on Wednesday, making it the top riser in the FTSE 100, on news it had begun to sell more items than a year before in the final six months of the period – a turnaround after high inflation prompted shoppers to put fewer items in their baskets.
About 220,000 staff will share a £70m “thank you” payment after the rise in profits, equivalent to 1.5% of annual pay, with a full-time shop worker expected to receive about £300.
The group expects to make at least the same level of profits in the year ahead as it cuts costs with new techniques, including a robot-led distribution centre for fresh produce and fitting 100 stores with solar panels over the next three years.
It said it did not expect to make major job cuts but was increasingly using artificial intelligence to take on repetitive tasks and improve forecasts of the amount of products and staff needed in stores, helping to cut waste.
Tesco’s profit margins rose above 4% for the first time since before the pandemic which it put down to cutting more than £600m in costs over the year and the benefit of selling more items.
The company’s chief executive, Ken Murphy, said he was “encouraged by signs of improving consumer sentiment” as inflation appeared to be stabilising at “low single digits” and he was “feeling quite positive” about the year ahead.
Murphy said: “Inflationary pressures have lessened substantially, however, we are conscious that things are still difficult for many customers, so we have worked hard to reduce prices.”
He said costs of some key commodities including cocoa, coffee, potatoes and crude oil continued to rise strongly, but that was largely being offset by price decreases elsewhere.
Tesco has benefited from a weaker performance at its rivals Asda and Morrisons over the past year as they have struggled to deal with debts after takeover deals. However, Murphy insisted there had been “no weakening of competitive intensity” as Germany’s Aldi and Lidl continued to open new stores.
Murphy said Tesco was taking share from “premium retailers” – thought to be Waitrose – and was now cheaper than Asda, although still behind the two German discounters.
“We now appeal to an increasingly broad spectrum of customers,” Murphy said, pointing to a near 16% rise in sales of its Finest premium own-label range to about £2bn.
The group, which already controlled more than a quarter of the UK grocery market, has increased market share in the past year, partly because of the success of its special discount scheme for loyalty card holders.
Tesco said there were now 8,000 products with Clubcard Prices discounts each week, with the number of households holding one of its loyalty cards up 6.2% to 22m, and 82% of sales using one.
Murphy said Tesco would complete the removal of the yellow blob on a blue background used to promote its Clubcard Prices scheme within nine weeks. The rebrand, which is expected to cost almost £8m, comes after the supermarket lost an appeal against a ruling that it had copied a design by Lidl.
Tesco has been criticised by small independent retailers for cutting the ranges available to them at its Booker wholesaler and making it more difficult to get deliveries.
Murphy said Booker’s retail range had been reduced by up to 200 lines but said customer satisfaction from independent retailers was up and Tesco was “doing a good job for them”.
