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Tesco profits fall as Covid costs offset sales surge

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Joanna Partridge and Sarah Butler
·4-min read
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<span>Photograph: Hollie Adams/Getty Images</span>
Photograph: Hollie Adams/Getty Images

Tesco’s profits tumbled by almost a fifth to £825m last year, after racking up almost £900m in extra costs caused by the coronavirus pandemic.

The UK’s biggest retailer won customers from rivals and its total sales rose by just over 7% to more than £53bn in the year to the end of February, beating City analysts’ expectations. In the UK and Ireland sales climbed 8.8%.

However, profits took a hit after Tesco incurred £892m of extra costs, including hiring more staff to provide online deliveries and to cover employees who were off work as a result of Covid-19 or while they were self-isolating.

Altogether almost 50,000 temporary workers joined the grocer during the pandemic, about 20,000 of whom have joined it permanently.

Online sales rose by 77% during the year, to £6.3bn, as the grocer swiftly doubled its capacity for online deliveries to 1.5m slots a week. In the final three months of the year online groceries made up 18% of sales as fear of the virus kept shoppers at home.

A poor performance at the group’s banking operation and a drop in underlying sales at Tesco’s Booker grocery wholesale business, which was hit by the closure of restaurants and cafes, also hit profits.

Tesco announced in December that it would repay in full £535m in business rate relief that it had accepted from the UK government. It had come under pressure to return the cash after paying out a £315m dividend to investors in October.

All the major grocers have now returned their business rate relief after benefiting from the switch to cooking, and drinking, at home while restaurants, cafes and pubs have been shut. Waitrose, the Co-Op and Iceland have declined to repay the relief they received.

Tesco said it anticipated that sales growth would slow as its shoppers returned to eating out and going to the pub, but profits would benefit as the one-off costs caused by the pandemic fell away. It said it would continue to face about a quarter of the extra costs associated with Covid-19 during the coming year but pledged to maintain its dividend and to continue to forgo any available business rates relief.

Ken Murphy, Tesco’s chief executive, who presented his first set of full year results after six months at the helm, said the retailer had shown “incredible strength and agility” during the pandemic.

Related: Asda to cease baking in stores, with 1,200 jobs at risk

“We have strengthened our brand, increased customer satisfaction and improved value perception. We have doubled the size of our online business and through Clubcard we’re building a digital customer platform,” he said.

Murphy said he would not be outlining a major new strategy for Tesco, but the group would be focusing on ensuring its prices were low compared with rivals and improving its loyalty scheme and digital services.

He said older shoppers were returning to large stores now that they had received their vaccinations, but it was difficult to assess the extent of changes in behaviour because of the timing of Easter and a sudden arrival of cold weather, which had also affected sales.

To deal with increased demand for online orders, the group opened a new, robot-powered fulfilment centre within its West Bromwich superstore during the year. A second is planned for May in its superstore at the Lakeside shopping mall in Essex, with four more by February.

Tesco said the pandemic had changed customer behaviour, with shoppers visiting stores less frequently but buying 50% more items in each visit.

Tesco had been “recast” in the eyes of the public, said Ross Hindle, an analyst at Third Bridge investment research firm, but challenges would remain after the pandemic.

“While Tesco’s Aldi price match strategy has been somewhat successful, the competitive threat of the discounters remains Tesco’s biggest risk. The end of the furlough scheme, a potential rise in unemployment and inflation worries could all send shoppers back to its cheaper competitors,” he said.

Tesco’s shares slid 2% to 227p on Wednesday.