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FTSE 100: Tesco warns customers 'facing a tough time' as profits hit £1.25bn

A general view of Tesco Extra store, in Warrington, Britain, January 13, 2022. REUTERS/Jason Cairnduff
Tesco said customers are looking for ways to make their money go further. Photo: Jason Cairnduff/Reuters (Jason Cairnduff / reuters)

Tesco (TSCO.L) has warned full-year profit will be at the lower end of its guidance as consumers turn to discount rivals amid a cost of living crisis.

The supermarket said UK households were already spending less as shopping habits normalised after the pandemic, but they are now cutting back even more because of inflation.

"We know our customers are facing a tough time and watching every penny to make ends meet,” said Ken Murphy, Tesco's chief executive.

The group posted a 10% fall in underlying retail operating profits to £1.25bn ($1.43bn) for the six months to 27 August, despite group sales excluding fuel rising 3.1% to £28.2bn.

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Tesco now expects annual underlying retail earnings of between £2.4bn and £2.5bn — the lower end of previous guidance for between £2.4bn and £2.6bn and a fall from the £2.7bnn notched up in the previous year.

Read more: Cost of living: UK's cheapest supermarket revealed

“Customers are seeking out the quality and value of our own-brand ranges as they work to make their money go further, whether they are switching from branded products, between categories or cutting back on eating out,” Murphy said.

“As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market,” he added.

Tesco’s non-food sales dropped by 6% year-on-year in the six months to the end of August.

The supermarket chain says it was competing against strong sales a year ago, when the COVID lockdown led to “exceptionally strong demand”.

But it may also signal that consumers are cutting back where they can.

However, Tesco reported a 0.7% rise in like-for-like UK sales in the first half — beating analysts' estimates of a decline.

Read more: How to have a more affordable Christmas

“These are tough times for many, and Tesco is not alone in feeling the resultant strain," Richard Hunter, head of markets at Interactive Investor, said.

"Tesco shares have declined over the last year by 17%, as compared to a marginal gain of just 0.1% for the wider FTSE 100 (^FTSE). This has in turn undone some of the previous progress, with the share price flat over the last two years.

"Even so, as the economic challenges mount, investors will continue to look towards those companies with the best chance of emerging on the other side in good shape. The market consensus of the shares as buy reflects confidence in such prospects,” he added.

“Tesco is in a better position to face competition from discounters. Our experts say Tesco has strong pricing power, a sufficiently wide range of products for customers to trade down in the store, and a big advantage in its Clubcard loyalty scheme,” Orwa Mohamad, consumer sector analyst at Third Bridge, said.

“Aldi and Lidl may be gaining market share but this is mainly from Morrisons and Sainsbury’s (SBRY.L) as savvy shoppers hunt for bargains in the cost of living crisis,” he added.

Read more: Supermarkets ‘refusing’ to pass on lower fuel prices to drivers, RAC says

Tesco said it would lock in the prices of more than 1,000 everyday products until next year.

It also announced that its shop staff in the UK are set to receive another pay rise, their second this year.

From 13 November the basic hourly rate of pay in stores will increase by 20p to £10.30 — or £10.98 in London — making a total 8% increase in pay this year.

Watch: Cost of living: Tesco 'inflating prices a little bit less and a little bit later' than the competition