Tesco has lots to celebrate but faces strengthening headwinds, says Kantar Retail

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Tesco Plc’s management, investors, and employees will have many reasons to celebrate after unveiling 2016/17 results, which have shown a full return to profitability and, more importantly, shopper satisfaction, according to Ray Gaul, VP retail insights Kantar Retail.

“Tesco can be proud to say that 80% of all shoppers claim they found staff helpful when visiting Tesco’s stores. Tesco can also successfully put the accounting scandals of the past behind them having settled legal affairs in the past 30 days. Now, Tesco will begin to fight all of its battles on the front foot,” said Gaul.

Gaul said signs of this attacking spirit can be seen in recent months. During the 2016/17 period, the company invested in range simplification, improved staffing programmes, and higher quality own brands. Kantar Worldpanel data shows that 64% of Tesco shoppers are now purchasing from the newly introduced line of Tesco Farm Brands. However, the crowning achievement of the year has been a return to customer satisfaction by doing more with less – simplified but improved ranges have paid off in full.

“The celebrations are well-earned but will need to be short-lived. Tesco’s management will soon fight battles on four new fronts,” said Gaul.

According to Kantar Retail, the largest battle the company will face is the upcoming anti-trust reviews related to the proposed merger with Booker Group Plc. “Management will spend considerable time, money, and political know-how to convince authorities and rebellious shareholders that the merger is good for the British public and healthy market competition,” said Gaul.

A second battle is emerging with suppliers needing to raise prices due to increased costs, Gaul added. Kantar Worldpanel figures show grocery inflation rising to 2.3% with expectations of even stronger price rises on the horizon.

A third battle will be with key competitors, said Gaul. Asda’s parent company, Walmart, has announced plans to invest strongly in winning back share from Tesco and supermarket discounters.

The final battle Tesco will face will be its own cost-base, Gaul said. “Rising costs will be relentless due to increased labour costs, business rates, and rising fuel prices. The company has taken steps to reduce managerial staff, particularly deputy store managers in Express stores, close distribution centres, and reduce opening hours at 24-hour stores. The question for 2017/18 is whether these cuts will be enough to lift sales and continue excellent progress in profitability. The fact that Tesco delivered GBP1,280 million in operating profit in 2016/17 and grew like-for-like sales for the first time since 2009/10 is reason enough to believe it may be possible.”