Tesco boss Ken Murphy talks costs, competition and cyber threats

Grocery leader Tesco delivered once again this morning, with group sales during the first quarter of the year up 4.6% to £16.3bn.

Like-for-like sales in the UK and Ireland were also up up 4.7% to £15.3bn while the UK business, Ireland and Booker also saw a 5.5%, 5.5% and 2% uplift respectively.

Despite a fiercely competitive market and retail headwinds, Tesco says it remains dedicated and focused on offering “great value, quality and service” – and its growing market share shows it’s winning over consumers.

Following Tesco’s trading update this morning, chief executive Ken Murphy spoke to the press about the ongoing price war within the sector, how Tesco is driving performance, the burden on the sector thanks to rising costs, and how the business is positioning itself to fight off any looming cyber security threats.

Costs, costs and more costs

“There are definitely continued inflationary pressures on the market. I think you’ve got to look at things like the impact of all the new taxation and regulatory costs on the industry. We’ve got to look at some of the commodity pressures on things like cocoa that continue to be quite strong, and impacts on things like meat and poultry. So that’s where I would point to as where the greatest pressures are, but we’re doing a pretty good job in managing inflation for customers over the first quarter.

With an eye to chancellor Rachel Reeves’s spending review and its impact on retailers, Murphy adds: “My reaction would be a fairly simple one, in that the retail industry incurred substantial additional costs in the last budget from a number of different areas. We had obviously National Living Wage, which we wholly support, the increased NIC costs, new employment legislation costs, extended producer responsibility costs through packaging and we have DRS coming next year from a Deposit Return Scheme point of view. Clearly we’re awaiting the business rates review with great interest.

“If you ladder up all of these costs, they are a substantial impact on the retail industry and we would strongly urge and hope that the government would not be looking to place additional burden on the retail industry at this stage.”

Cybersecurity: a prominent threat

A looming threat and concern for retailers across the board to date is the threat of a cyber attack, particularly for Tesco following recent attacks on its rivals Marks & Spencer and Co-op among others. 

“We stay on top of cyber all the time, we have invested continuously in upgrading our cyber capabilities because this is a moving target all the time,” says Murphy.

“As the sophistication of potential attackers improves, we have to keep investing behind it and that’s what we do. We stay very vigilant, we invest substantially behind it, we seek to learn from what’s going on in the industry. We stay close to the industry bodies and government bodies to make sure that we’re applying any shared learnings.

“It’s just a constant ongoing battle but we haven’t seen any uptick in activity or attacks since some of our competitors were attacked, so we haven’t seen any material changes.”

He says that Tesco stepped in to provide emergency stock for both M&S and Co-op after they were hit by cyberattacks recently.

“We absolutely feel great sympathy for both M&S and Co-op because this is a threat we face as an industry. 

“Over the period when they had been impacted, Booker [Tesco’s wholesale arm] has supplied both M&S and Co-op with product and supported them in anyway they could. Our performance over the quarter, however, has been so broad based I wouldn’t say we have seen a material impact from Co-op or M&S.”

Competition, inflation and price wars

And as the competition ramps up, Murphy says that all of its competitors have upped their game, but he’s still confident in the Tesco proposition. 

“The reported industry rate of inflation by Kantar is something just over 3%, I think between 3% and 3.5%, and our rate of inflation is below that, as we’ve worked very hard to manage pricing and be competitive. I think that’s partially reflected in the great performance we’ve had this quarter.

“What we see at the moment is that customers are really looking for great value for money. They’re looking for good quality products at great value – and it’s an obvious thing to say, but it is something that’s even more accentuated.

“They’re dining more at home, they’re eating more fresh food and the summer weather – the good weather – has definitely helped them. And so we’ve been able to fulfill that need really, really well, and they see the value and the quality that we’re providing. And that’s really what’s driven our performance.

“In terms of the underlying confidence, I can’t really comment too much. Clearly we have a slightly rosier tint on things because of our performance and the resilience we see in our business. We do know that people are worried, they’re worried about the environment generally, the tariffs, the geopolitics, and they’re concerned, but for now at least it hasn’t been impacting how they’re behaving with Tesco.

“We are seeing an intensely competitive market overall. We’re seeing intense competition from all aspects of the market and our guidance reflected and continues to reflect that. I think from what you can take from our first quarter performance is that we’re responding really well, and customers, are recognising that we are particularly competitive across all aspects of the shopping trip, not just price.

“We’re not necessarily seeing massive movement in relative competitiveness, but everyone has upped their game a notch and that would be broadly what we’re seeing across the industry. Clearly, we’ve responded, and I think responded very effectively, but importantly I think we’ve done so without dropping the ball on quality, innovation and the shopping trip, and that really is what has underpinned our success. Value underpins everybody’s offering, but it really is the combination of the full shopping trip that then drives success.”

F&F is back

“The reason I’m so delighted about our ability to launch F&F online, and we were only able to achieve this through the marketplace, was the fact that 80% of clothing shopping missions start online.

“We only have the full range of F&F available in a couple hundred stores across our estate, so having the full catalogue available online has been a fantastic unlock for future growth for Tesco.

“F&F is a fabulous brand with great quality at unbelievable prices, so we think it’s going to be hugely successful online.”

Whoosh – is Tesco’s rapid delivery a help or a hindrance?

“In terms of the Whoosh offering, I think I would say a couple of things. The quick commerce mission is here to stay, and what we’ve been delighted by is the customer response to Whoosh because in relative terms, it’s great value, it’s a very reliable service, it regularly arrives well within that half-hour period and therefore the responsiveness to it has been really, really strong.

“What we’ve seen is genuinely incremental – up to 80% of the sales are incremental to the store, so it’s not remotely as cannibalistic as maybe you would assume. It’s a really good offer, and it’s very useful to time-pressed people and families that need a product in very short order.”