Tesco’s trading updates often split the City, and Tuesday’s third-quarter announcement was no exception. Some highlighted that UK like-for-like growth was below expectations, while others reiterated the longer-term benefits of being more than just a UK food retailer.
Tesco has been building up its momentum after a subdued start to the year and many expected fireworks when it reported its third-quarter trading. What the City got instead was a solid update with little to get excited about.
The significant fall in food price inflation has put a dent in Tesco’s like-for-like sales, but this is going to affect all the grocery retailers and is not in itself a sign of weakness in the business.
Where Tesco is going to make headway is in the strength of its non-food business. Its non-food like-for-likes are improving, particularly in areas such as toys, electricals and entertainment – areas where market share has been up for grabs since the collapse of Woolworths last year – and as the economy picks up, Tesco will only continue to gain ground here.
Tesco has also sharpened its claws for Christmas. Its extra £100m of Clubcard vouchers are in circulation and the grocer expects about 50% to be redeemed in the festive season. Alongside the Clubcard onslaught, Tesco is also targeting the upmarket grocers with hefty price cuts on its Finest ranges.
Overseas, Tesco said like-for-likes are improving. While the movement in the third quarter was slight, it’s a move in the right direction and the grocer expects to be in positive territory over Christmas. Broker Bernstein estimates that if current exchange rate trends prevail, Tesco will continue to enjoy a 6% tailwind to international sales in the next few quarters.
If Tesco’s pre-Christmas Clubcard promotion does not provide a sufficient lift to sales, there will be cause for concern. But if it does, coupled with its non-food and overseas growth, the grocer is looking in good shape.
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