Tesco has returned to the black, reporting pre-tax profits of £162m for the year to 27 February 2016 and a 0.9% increase in like-for-like sales in the fourth quarter, the first positive sales growth in three years.
Stephen Springham, partner and head of retail research at Knight Frank, said Tesco’s full-year figures today provide cause for sustained optimism rather than outright celebration.
“Tesco is undoubtedly in far better shape corporately, financially and strategically than it was 12 or 24 months ago,” he said. “Amidst all the drastic corporate restructuring and disposal of non-core/peripheral businesses, the central plank of the recovery has been (and will continue to be) a renewed focus on the single most important stakeholder of all – the customer. The business has made considerable investment in improving the customer offer, driving a simple value message of more round pound pricing and price-marked packs (particularly in fresh). It is also increasingly grasping the nettle of achieving profitability in online grocery by re-balancing sales back into stores through click & collect and reviewing its charging rates on home delivery (eg Tesco Direct orders below £30 surcharged and weekend delivery charges raised).
“For all the positivity, Tesco’s shares fell today in early trading. In part, this reflects a degree of over-optimism as to how quickly trading improvements might translate into meaningful profit improvement. The recovery at Tesco is a sustainable one and the business is very much on the right track. But the right track is also a long, arduous one, with many a pitfall along the way.”
Ray Gaul, vice president of research and analytics, Kantar Retail, agreed Tesco’s investments in pricing were paying dividends and delivering footfall and shopper growth in all parts of the UK grocery business.
“However, the most important turnaround will be seen in Tesco’s large formats,” he said. Tesco Extra stores are now seeing positive footfall growth, which in turn is driving higher like-for-like sales. The UK business grew like-for-like sales by 0.9% in the fourth quarter after multiple quarters of declines. Looking to 2016/2017, Tesco will continue to battle deflation and aggressive pricing strategies from its main competitors, including Aldi and Lidl, but is in a much better position to fight as it looks forward.”