Inflation, cost cutting and Clubcard clout – takeaways from Tesco’s Ken Murphy

Given that Tesco chief executive Ken Murphy was speaking on a day when the retailer had reported a 159% surge in annual pre-tax profits to £2.3bn and a 7.4% jump in group sales to £61.5bn, it’s hardly surprising that he was in confident mood.

He said the “strong performance” last year “reflected the hard work of colleagues… and their commitment to serving our customers”.

Despite the encouraging performance, Murphy was more cautious about the outlook for this year and was reluctant to overpromise.

While Murphy thought there were “encouraging” signs around inflation coming down, he said Tesco and the industry must remain “conscious that things are still difficult for many customers”.

Not out of the woods

Murphy said headline inflation seemed to be stabilising at “low single-digit” levels and Tesco was inflating “well below” that figure. 

However, he said some key commodities prices, including cocoa, coffee, potatoes and crude oil, continue to rise strongly and he was conscious that “things are still difficult for many customers”.

Murphy pointed out that in the last year, Tesco became the “cheapest full-line grocer” in the UK, investing in price cuts on 4,000 key products and through its Aldi Price Match scheme, Low Everyday Prices and Clubcard Prices.

“I think one of the characteristics of anybody in grocery retail is a healthy dose of paranoia”

Ken Murphy, Tesco

“We now appeal to an increasingly broad spectrum of customers. We really pride ourselves on having something for everyone. No matter what your pocket or wallet, you’re welcome at Tesco; that’s really the whole ethos of the business,” he said.

To illustrate his point, Murphy pointed to a 16% rise in sales of the Finest premium own-label range, “which is now a £2bn business in itself”, as proof of the retailer’s cross-market appeal.

Shore Capital analyst Clive Black said Tesco is in a uniquely strong position in a deflationary environment to push ahead. “The industry dynamics have evolved in their favour, partly reflecting the leadership skills of [Murphy] and partly from the evolution of the industry’s organisational composition,” he said. 

Good not good enough?

Despite the surging metrics, Murphy still faced questions about whether Tesco was fully capitalising on its strong position, given the struggles of Morrisons and Asda, and the fact that Sainsbury’s has been outgrowing it, according to the latest Kantar figures.

He was also asked whether Tesco could be going even further on price, given its stellar profit numbers.

Murphy said it all comes down to “getting the balance right [between] being very competitive on price, still investing heavily in the business, investing in product quality and investing in the customer experience”.

He also laughed away suggestions that the UK grocery market has become less competitive, given the travails at Asda and Morrisons.

“The fact there are 11 national grocers all competing means that someone is always coming strong,” he maintained, adding that the discounters have grown stronger over the last decade as they continue to add new stores across the country.

Some analysts have also suggested that Tesco and the wider grocery market have squeezed as much as they can out of food and will need to look to other categories such as apparel to continue their growth − particularly as they start to lap increasingly punchy like-for-like sales figures on food as the year goes on.

“Tesco UK performance slowed each quarter from 9% in Q1 to 5.8% in Q4,” said GlobalData senior retail analyst Eleanor Simpson-Gould. “Tesco is entering a new financial year where we expect to see a normalisation of sales growth”. 

However, Bernstein’s William Woods said: “Tesco typically guides conservatively and there is room to beat the guide.”

Efficiency, efficiency, efficiency

Much like Sainsbury’s, despite delivering strong numbers, Tesco also outlined another £500m worth of efficiency savings it will make this year.

They will be found by deploying approaches such as a new automated distribution centre for fresh produce and cutting energy bills by installing solar panels at 100 stores over the next three years.

“On the shop floor, we’ve put in more hours than ever before over the last six months and the plan is for that to continue”

Imran Nawaz, Tesco

When pressed on whether this would lead to any job losses, chief financial officer Imran Nawaz said it wouldn’t be cutting jobs to save costs.

He observed that Tesco has already taken out over £1bn of costs in the last year without any material job losses. “We’re just looking to eliminate work that doesn’t add value to customers and then we can redeploy those people to help us grow sales, which is what we’ve been doing,” he said.

“On the shop floor, we’ve put in more hours than ever before over the last six months and the plan is for that to continue.”

Clubcard’s clout

In another cost-of-living trend that’s showing no sign of easing, Murphy also said the retailer’s Clubcard loyalty scheme continues to go from strength to strength.

Eighty-two per cent of sales in the retailer’s largest stores are going through Clubcard and about 70% of transactions across its entire estate and online involve a Clubcard.

“It’s hugely valued by customers because it’s a great source of value,” Murphy said. Tesco now has 8,000 products on Clubcard Price discounts with the number of households holding one of its loyalty cards up 6.2% to 22 million.

He said Tesco was “working very closely” with the Competition and Markets Authority on its probe into grocery loyalty schemes.

It has already agreed to display the price per unit on Clubcard promotions alongside the total price to make price comparisons easier. Other grocers are likely to do the same.  

As Tesco enters its new financial year, the biggest threat would be complacency as conditions ease. Murphy intends to make sure that doesn’t happen: “I think one of the characteristics of anybody in grocery retail is a healthy dose of paranoia.”