Shares in supermarket group Tesco (TSCO) edged 0.27% higher to 227p after a surge in sales, though this was offset by rising costs with profit expected to remain flat this year.

The supermarket’s first quarter trading update for the 13 weeks to 30 May revealed shoppers are buying more during fewer trips, with shopping frequency down 32% but the basket size up 64%.

This seemingly helped total group revenues rise 7.9%, against market consensus of 6.9%, while its UK like for like sales jumped 8.7%, led by a 48% increase in online revenue.

The grocery giant doubled its delivery slots to cope with demand, which surpassed 16% of total sales at the end of the quarter against a usual run rate of 9%. The company sees online sales growing by £2 billion over the full year.

SALES SURGE COMES AT A COST

However, Tesco said the sudden increase in sales both in-store and online came at ‘significant’ cost, which was only partly offset by increased sales volumes and relief from government programmes.

The supermarket added that while any forecast is ‘inherently uncertain’, based on an assumption of a continued easing of lockdown restrictions in the UK it expects its retail operating profit in the current year to be at a similar level to 2019/20 on a continuing operations basis.

The majority of the costs it has incurred relate to payroll which includes the provision of twelve weeks’ paid leave to 26,000 vulnerable staff, in addition to the recruitment of 47,000 temporary workers to cover absence and meet increased demand.

Tesco said it also incurred costs in areas such as distribution, where it needed to reopen previously mothballed distribution centres and property, as well as taking a hit from adapting the store environment and providing personal protective equipment and other safety-related consumables.

In total, Tesco’s latest full year estimate of incremental costs for its UK business is around £840 million, costs which it said will be partially mitigated by the UK business rates relief of £532 million and a contribution from additional food sales.

TESCO EFFORTS COULD BOOST CUSTOMER LOYALTY

AJ Bell investment director Russ Mould thinks Tesco’s efforts during the pandemic so far in increasing online deliveries, ensuring it keeps shelves stocked with items people need, and providing employment to people who’ve suddenly found themselves out of work, could result in greater customer loyalty down the line.

Mould said ‘The rewards of these efforts are laid out in its latest trading update which shows big growth in food sales and a surge in online business which is likely to have resulted in more households switching their loyalty to Tesco as the supermarket where it is generally easier to get delivery slots than its rivals.’

He added that while these ‘growth achievements’ have incurred extra costs, from a strategic perspective Tesco will have ‘gained a lot of credibility among the public’, which will help in its fight against discounters Aldi and Lidl.

Mould continued, ‘It shouldn’t really matter that profits have been held back by higher costs as this issue is likely to be outweighed by the longer-term benefits Tesco can enjoy if it has managed to attract customers from rivals and secured their future loyalty.’

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Issue Date: 26 Jun 2020