Tesco makes progress at home and overseas but Brexit could impact prices and exchange rates, analysts warn

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Tesco has reported its second consecutive quarter of growth. Like--for-like sales in the UK were up 0.3% and by 0.9% for the group as a whole in the 13 weeks to 28 May.

Analysts said they were encouraged by the performance but suggested Tesco’s businesses in Malaysia and Thailand now looked increasingly isolated following the sale of the supermarket’s operations in Turkey and Korea. A Brexit could also create a tougher trading environment for the business due to inflationary and exchange rate pressures, they added.

David Gray, senior retail analyst at Planet Retail, said: “As expected, Tesco has reported another domestic like-for-like increase driven by some decent volume growth across the core food business. This is encouraging news, considering Tesco has been putting major efforts into improving the proposition through range enhancements, price investments and store refreshes (where it is taking a more mission-based approach to store layout). Upward-facing like-for-likes also come at a time when deflation is still an issue for the wider industry, showing just how far Tesco has come.

“That said, Asda’s decision to focus squarely on market share rather than profitability as a performance indicator could entail some headwinds for Britain’s biggest grocer, although, given its present woes, it’ll undoubtedly take some time for Asda to return to full strength.

“The big story of the quarter is that Tesco is now free of the shackles of the failing Turkish business – an operation which, for years, has been a drain on vital group cash and management resources. The disposal will liberate resources to sustain focus on domestic improvements.

“However, this exit, alongside Korea, does leave Thailand and Malaysia looking increasingly isolated among Tesco’s portfolio. The latter has limited growth potential due to restrictive regulation. Therefore, longer term we still see some scope for further international rationalisation.”

Ray Gaul, VP, Kantar Retail, said: “These results vindicate a number of tough but important actions – such as focusing on permanently lower prices, lower promotional activity, divestment of non-core businesses, headcount reductions – undertaken by Dave Lewis since he took over the business in 2014.

“We expect the trading environment to remain tough for Tesco, and things could get even tougher if the UK votes out of the European Union, which is likely to impact grocery prices and currency exchange rates. Inflationary conditions caused by the EU exit might increase the erosion of Tesco shoppers to discount chains like Aldi and Lidl. Secondly, major fluctuations in the exchange rate could put further pressure on the retailer’s operations in Poland, Hungary, Czech Republic and Slovakia, which are still grappling with growth and profitability issues.”