Tesco profit set to fall as tough UK economy bites

Tesco, Britain's biggest retailer, warned profit would fall in the current year as the tough economic conditions and pressure on consumers forced it to work harder to retain its customers. With a more than 27% share of Britain's grocery market, Tesco reported retail adjusted operating profit of 2.65 billion pounds ($3.45 billion) in the year to end Feb., up 36% and in line with guidance.

Tesco, Britain's biggest retailer, warned profit would fall in the current year as the tough economic conditions and pressure on consumers forced it to work harder to retain its customers. With a more than 27% share of Britain's grocery market, Tesco reported retail adjusted operating profit of 2.65 billion pounds ($3.45 billion) in the year to end Feb., up 36% and in line with guidance. It forecast profit of between 2.4 billion pounds and 2.6 billion pounds for the 2022-23 year.

Its shares fell 5% in early trade. "Given the significant uncertainties in the external environment, we believe it is appropriate to provide profit guidance in the form of a wider than usual range," Tesco said as it published results for the year to Feb. 26.

Britain's inflation rate hit a 30-year high of 7% in March, even before April's sharp increase in utility bills. The accelerating price growth is causing the biggest squeeze on household incomes since at least the 1950s. Tesco said three factors were likely to influence its performance - the return to more normal customer behaviour after the COVID-19 pandemic, its ability to offset the level of cost inflation, and the investment required to maintain its low prices.

"Clearly, the external environment has become more challenging in recent months," said CEO Ken Murphy. "Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check."

A cost of living crisis and supply chain disruption due to Russia's invasion of Ukraine is weighing on the UK grocery sector. Last week, Morrisons, Britain's No. 4 supermarket group, warned its annual profit year could be hit by the conflict and rising inflation. No. 7 player, the Co-operative Group, warned of "stark" economic headwinds.

The war in Ukraine has hurt supplies of sunflower oil, and has driven-up animal feed and wheat prices, which has had a knock-on effect on meat, dairy and bakery. Soaring energy prices, as well as increased labour costs have also added to the cost of doing business.

Market data suggests shoppers have started to shift their buying habits to save money, opting for more cheaper own label food products. Tesco said total group sales rose 3.0% to 54.8 billion pounds in its 2021-22 year. It also outperformed its three biggest rivals - Sainsbury's, Asda and Morrisons.

The group has to date returned 300 million pounds to shareholders through a share buyback programme and has committed to a further 750 million pounds by April 2023. ($1 = 0.7681 pounds)