Analysis: Tesco boss Ken Murphy on plans to combat a cash-strapped Christmas

How quickly things can change in the world of grocery retail. Discussing Tesco’s half-year results today (October 5), chief executive Ken Murphy noted that the number of customers trading down across the product mix had surged compared with the end of the first quarter when it stood at less than 1%.

While he would not give an exact figure, he observed: “We’ve seen more trading down to own label. We’ve seen more frequent shopping trips and smaller basket sizes across most formats, except online where the basket sizes remain flat. We’ve also seen people trading into frozen a little bit more than fresh.”

This shift in consumer behaviour has led Tesco to double down on its focus on price – freezing the prices of approximately 1,000 products across its Everyday Low Prices. 

While welcomed by customers, the investment has contributed to a squeezed margin and hit half-year profits, which fell 9.8% to £1.32bn on sales of £28.18bn for the period. 

As all eyes turn to Christmas, Murphy discussed how Tesco will combat inflation, the added complexity of a winter World Cup and the rampant growth of the discounters. 

Grabbing the sales early

This year Tesco launched a number of Sales for Clubcard members earlier than in previous years. This week the grocer unveiled a half-price toy sale ahead of Christmas, which Murphy said will help families manage their spend. 

Tesco also began its back-to-school Sale earlier in 2022 than usual, as well as a 25%-off-six offer on selected beers, wines and spirits, and a new clothing promotion event to offset a general trend away from general merchandise and fashion purchases.

“[With the Sales] the one thing we are trying to do is to smooth the spending patterns for our customers so they can afford to give their families a great Christmas, and manage that spend over a longer period,” Murphy said.  

The linking of offers to Clubcard also feeds into Murphy’s longer-term strategy of embedding Tesco’s loyalty scheme into the heart of its relationship with customers. According to Murphy, 75% of transactions are now being conducted by customers with a Clubcard.

“You’d be mad not to shop with a Clubcard at Tesco,” he insisted. 

Quality over quantity

While Murphy said affordability will be top of the agenda for customers this Christmas, he also believes they will not want to compromise on quality, even at lower price points. 

Tesco reported a 13% year-on-year increase in sales of its own-brand Finest ranges in the first half. Believing more customers will celebrate at home this Christmas because of surging costs, Murphy said ranges such as Finest give the grocer an edge. 

“People are going to want to celebrate, but clearly celebrate with us in an affordable way. For that reason we think there’s going to be more dining in and more celebrating at home,” he said. 

“We believe that the gifts this year will be smaller and [given] to a tighter and smaller group of family and friends, and we’re adapting our proposition to suit those trends.”

While Christmas trading may be more about quality over quantity, one great unknown is the effect of a winter World Cup.

Murphy said the tournament would add complexity to the usual Christmas planning, but expected to see an uptick in sales – either at Tesco stores for customers watching at home, or through Booker wholesale if they watch in pubs. 

“This is a bit of a curveball in terms of how do you plan Christmas and the World Cup at the same time? The good news is that both, hopefully, for England involve celebrations. What we’re doing is gearing up to make sure that people can celebrate and can get everything they need.”

Dealing with the discounters

Historic inflation combined with economic instability has created the perfect conditions for the discounters to go on the attack in a way not seen since the global financial crash. 

In September, Aldi overtook Morrisons by market share to become the fourth-biggest grocer, while Lidl also enjoyed a bumper period of growth. 

Murphy maintained that, having expanded its price freeze to approximately 1,000 everyday products, Tesco has never been more competitive on price against the discounters. 

While he would not put a percentage figure on how much more expensive an average Tesco basket is compared with Aldi, Murphy refuted the 15% asserted today by analysts at Bernstein. 

“We think it’s a lot tighter than that. We’ve improved materially on that number over the last 12 months,” he said. 

“Tesco is the most convenient destination for almost every British shopper in terms of our proximity to the customer”

Despite Murphy’s firmness on Tesco’s improving price proposition, he conceded that Aldi remains the cheapest supermarket in the UK. However, he said Tesco’s overall UK coverage and cross-channel offering made it the most convenient and accessible food retailer in the country.

“Tesco is the most convenient destination for almost every British shopper in terms of our proximity to the customer. We’re the only ones that have a fully nationally comprehensive online proposition, a really extensive Express c-stores network and the largest of the large store formats. 

“Our plan really is to be able to take away the worry that you’re paying more in our shops for all of the essentials you can find in a limited range discounter, but also make sure you can get everything else you need.”

Tesco has the scale and the weapons in its arsenal to deal with the third Christmas in a row marked by historic disruption. However, Murphy’s predictions of smaller Christmas gatherings, more spread out customer spend and the added complexity of a major football tournament could leave other retailers feeling the chill early. 

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