Tesco’s chief executive has warned that UK inflation could rise higher before it comes down later this year as consumers increasingly trade down to cheaper products.
“We are not sure that inflation has peaked just yet, but we would hope that by the middle of the year it will start to come down the other side,” said Ken Murphy. He cautioned that factors such as commodity and energy prices, harvests, crop yields and the war in Ukraine could all influence the outcome.
In April, Tesco said it would take a £260mn hit to profits in its current financial year as it absorbed some of the cost inflation in the supply chain, rather than passing it on to consumers.
At that time, food prices were rising at an annual rate of 5.9 per cent; the latest data shows them more than 16 per cent higher year on year even though there are signs that the headline inflation rate is starting to recede.
On Thursday, Tesco said it still expected to make a retail operating profit, which excludes financial services income, of between £2.4bn and 2.6bn for the year thanks to a strong Christmas performance.
UK sales grew 7.2 per cent in the six weeks to January 7, similar to the growth reported by its rival J Sainsbury this week and ahead of the average market forecast of 6.4 per cent growth.
Group same-store sales, which include operations in Ireland and central Europe along with the Booker wholesale business, were up 7.9 per cent.
Tesco shares were slightly higher in mid-morning trade at £2.45.
Murphy said the company had planned for a strong festive period after research and customer data suggested that consumers would splash out for the first Christmas in two years not to be disrupted by the Covid-19 pandemic.
“We were pretty confident about Christmas at the first half [results],” he said. “But customers shopped in quite an intelligent, responsible way, managing their spend, spreading it a little bit further and looking for better value products.”
At the budget end, shoppers are buying more own-label products and more frozen food, with sales of an expanded frozen range up 25 per cent on last year in the week before Christmas.
They are also switching from full-range supermarkets to discounters, though Murphy said this was being cancelled out by people switching from other retailers to Tesco and it was gaining customers overall.
At the top end, the company’s premium Finest range and its “That’s dinner sorted” promotion have provided consumers with a cheaper alternative to going out to eat or ordering a takeaway.
Simon Roberts, chief executive of Sainsbury’s, also reported strong sales of premium ranges and his counterpart at Marks and Spencer, Stuart Machin, said many of its upmarket products had sold out over Christmas.
Murphy said Tesco was planning for the customary period of post-Christmas belt-tightening, having already announced price freezes on 1,000 lines through until Easter, but said he was “cautiously optimistic” about the outlook for 2023.
“Consumers are weathering the storm and the recession may be a bit shallower than people were thinking it would be — but the truth is we just don’t know”.
Machin said that M&S customers, who tend to be slightly older and more affluent than those of mainstream supermarkets, were “slightly more insulated” from cost of living pressures and that they were “letting us know that they are still planning for occasions”.