UK inflation, at a 30-year high of 7 per cent, is bad news for consumers. Bad for shops too, reckons the nation’s biggest grocery store. Tesco is guiding for flat or falling retail operating profits this year — from £2.65bn to between £2.4bn and £2.6bn — as the consumer squeeze hits.
Tesco, with a 27 per cent share of the UK grocery market, is rightly cautious but mildly disingenuous too. Historically, inflation boosts supermarket profits. Food staples are Giffen goods of sorts — higher prices boost rather than dent spending for these. As the market leader, with a share almost the size of the next two biggest stores, Sainsbury and Asda combined, Tesco has leverage with suppliers. It has learnt from the last crisis. Back then, it protected profit margins and sent customers to discounters.
Still, shopping behaviour will change — fewer treats as well as shifts to cheaper own-brands and discounters such as Aldi and Lidl. Tesco faces its own rising bills from suppliers, transport and labour. Higher heating costs impact everything from chicken to cucumbers.
It cuts where it can: shifting almost 90,000 containers off gas-guzzling lorries and on to trains and trialling fully electric HGVs. But some inputs are harder to pare back. The “substantial new pay deals” agreed with workers will add £200mn to labour costs. These have climbed £400mn over four years to £6.4bn in fiscal 2021, even after shedding a quarter of the full-time equivalent staff — partly reflecting the sale of its Thai operation.
For Tesco, inflation is a political hot potato; minting big profits during a cost of living crisis is not a good look. Campaigners are gaining sway, pointing out the disproportionate impact on poorer households. Even plugging average spends on food, energy and the rest into the Office for National Statistics’ newly launched DIY inflation calculator generates a rate 0.4 percentage points above the current level.
Tesco tackles this with discount ranges and price-matching with discounter peer Aldi. Inflation notwithstanding, Tesco brags that some items are cheaper than a decade ago: two litres of milk now costs £1.25 versus £1.58 in 2010.
Tesco’s wariness makes sense. But the odds are that inflation causes less pain to shops than shoppers.
Source: Economy - ft.com
