Profits at Tesco have slipped by almost a fifth despite grocery sales surging in an “exceptional year” after the supermarket chain nursed almost £900 million of costs related to coronavirus.
The UK’s biggest retailer said that while it expected its sales to be lower as people returned to eating out, it expected costs to fall to around £200 million for the remainder of the year meaning its profits and cash flow should have a “strong recovery”.
Tesco reported that group revenue fell by 0.4 per cent to £57.9 billion in the year to February, compared with £58.1 billion a year earlier. Pre-tax profit fell by 19.7 per cent to £825 million from £1.028 billion after handing back £585 million of business rates relief in December. The supermarket is paying a final 5.95p dividend to take its final dividend to 9.15p.
Tesco said that it had faced £892 million of costs directly related to Covid-19,with the biggest cost from higher payroll provisions, including hiring 49,600 temporary staff, full sick pay for shielding workers and staff bonuses.
The fall in profits is also partly related to a £295 million writedown of its Tesco bank, which reported a £175 million operating loss during the year although the company said that it anticipated a return to profitability this year.
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In the UK and the Republic of Ireland Tesco’s sales rose by 8.8 per cent to £48.8 billion, helped by a 77 per cent boom in online sales to £6.3 billion. The supermarket has rapidly grown its capacity to deliver 1.5 million orders a week compared with Ocado’s 360,000 a week.
Ken Murphy, the chief executive, said that during the past year Tesco had “gained customers from all key competitors, bolstered our value credentials in the eye of consumers and doubled the size of our online business”.
Murphy, 53, who took over from Dave Lewis in October, said that he would not be doing “one big strategic reveal” but the supermarket would be announcing initiatives as they landed them “so you are seeing as we are delivering”.
The Cork-born businessman, who had been a lifer at Walgreens Boots Alliance, said his area of focus would be improving and growing Tesco’s value credentials, loyalty and online business.
In the past year Tesco launched an Aldi-price match promotion on 500 products and it has introduced lower Clubcard prices, which cuts the price of items such as Kellogg’s Coco Pops from £3 to £2 for members, on 3,000 products. Murphy said that Clubcard was now used in 80 per cent of sales with five million digital customers using its app.
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The supermarket’s online business accounts for 18 per cent of total sales, with click and collect, which is more profitable for the business, making up a quarter of orders. The business has been trialling a robotic urban fulfilment centre in its West Bromwich Extra hypermarket which is now able to pick 500 orders a day. It is opening a second in its Lakeside Extra store next month and has four more sites to open within the next year. Murphy had previously called the move a “gamechanger” for its online business and said that while the fulfilment centre’s pick rate was similar to what could be achieved by human staff in store, the costs were “dramatically” lower. Tesco said in January that its online business was now profitable.
The supermarket said that sales in its larger shops grew by 1.5 per cent, helped by bigger baskets despite fewer trips to stores. Murphy said that Tesco had also noticed a recent return of older customers to its stores after the vaccine programme.
The supermarket completed a £8.2 billion sale of its Thailand and Malaysia business in December, paving the way to returning £5 billion to shareholders via a special dividend and a £2.5 billion one-off contribution to its pension scheme.
Tesco also announced that Thierry Garnier, the Kingfisher boss, and Bertrand Bodson, the chief digital officer at Novartis, would be joining the board. Meanwhile Deanna Oppenheimer, the senior independent director, Mikael Olsson and Mark Armour are retiring from the board. “They have all brought excellent insights and wise counsel to the board and its committees, and we wish them well for the future”, John Allan, the Tesco chairman, said.
Shares in Tesco fell 3 per cent, or 7½p, to 224½p.
