Photographer: Chris Ratcliffe/Bloomberg

Tesco Lays Down Price Gauntlet to Rivals as Pressure Grows

Updated on
  • Grocer passing on less inflation to customers than rivals
  • Shares slide as CEO Lewis says discounter demand is resurgent

U.K. supermarket leader Tesco Plc vowed to keep prices low as discounters regain their sales momentum, ratcheting up the pressure on an industry beset by shrinking profitability.

As sterling’s Brexit-induced decline pushes up the cost of imported produce, the grocer said Wednesday it’s passing less of that increased expense on to customers than any of its main competitors. The shares fell as much as 6.3 percent, the most in more than nine months.

After two years of falling grocery prices, retailers are now increasing what they charge, though Tesco’s stance means that pressure on margins across the industry is unlikely to relent. That, added to a re-acceleration of sales growth at budget chains Aldi and Lidl, is set to weigh on the outlook for recovery across the industry. Discounter demand is resurgent, Chief Executive Officer Dave Lewis said at a press conference.

“It’s a negative for the rest of the market,” said Charles Allen, an analyst at Bloomberg Intelligence. “It’s hard to see how there won’t be a squeeze on retailer’s margins.”

Tesco shares were down 5.7 percent at 12:25 p.m. in London, the steepest decline in the U.K. benchmark FTSE 100 Index. Rivals J Sainsbury Plc and Wm Morrison Supermarkets Plc also fell.

“There is inflationary pressure there, but we try and offset everything we possibly can by working with our supplier base,” CEO Lewis said on a conference call as he reported an estimate-beating rebound in full-year earnings.

Grocery prices started rising in the fourth quarter of last year, when inflation was between 0.5 percent and 0.6 percent, Lewis said. The cost of a typical customer basket is still about 6 percent cheaper than in September 2014, he said.

Should the renewed momentum of the discounters continue beyond Easter, Tesco will reconsider its trading approach, the CEO said.

Tesco’s adjusted operating profit rose 30 percent to 1.28 billion pounds ($1.6 billion) in the 12 months ended Feb. 25, beating the analyst estimate by 1.6 percent. Earnings are still less than half of what they were five years ago after the encroachment of the discounters and an accounting scandal.

Ahead of Plan

“We are ahead of where we expected to be at this stage,” Lewis said in the statement. “We are confident that we can build on this strong performance in the year ahead.”

The earnings provide a tonic for Lewis as dissent over his proposed 3.7 billion-pound takeover of food wholesaler Booker has spread from the boardroom to the company’s investors. Tesco continues to engage with the U.K. competition regulator and expects to seek approval from its shareholders for the deal in late 2017 or early 2018, the CEO said.

The retailer said it’s already achieved 226 million pounds of a 1.5 billion-pound cost-saving target, boosting the credibility of its goal to double profit margins. Buying Booker doesn’t jeopardize that target, Lewis said.

In the fourth quarter, same-store sales growth in the U.K. slowed to 0.7 percent from 1.8 percent in the third quarter. That matched analyst estimates.

(Updates with CEO comments in seventh paragraph.)
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