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Tesco targets Christmas price cuts in fresh challenge to rivals

Ken Murphy Tesco
Ken Murphy Tesco

The boss of Tesco has vowed to lower prices even further in the run-up to Christmas as its rivals scramble to keep shelves stocked amid a severe shortage of drivers.

Ken Murphy, chief executive, said he wanted Tesco to provide “magnetic value” for customers despite commodity price increases and rising delivery costs.

He said: “Clearly, price will remain a critical part and we will maintain the competitiveness we have established.”

The Big Four supermarkets have been waging a price war over the past 18 months after Tesco launched its Aldi price match in March last year.

Tesco said on Wednesday that it added a further 100 own-label products to the scheme last month, meaning it has now cut the price of 650 essential groceries to match Aldi. Similarly, it relaunched “low everyday prices” on 1,600 products and it now offers discounted rates for Clubcard users.

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In a further challenge to Tesco’s competitors, Mr Murphy said the supermarket will improve its loyalty scheme and pledged to be the most “convenient” supermarket for shoppers. He added that Tesco planned to achieve £1bn in cost savings over the next three years.

Mr Murphy said that he wanted Tesco to hold onto its dominance as Britain’s biggest supermarket and grow its market share even further.

The chain said it was confident of good product availability this Christmas, but there could still be “bumps in the road” amid a shortage of delivery drivers and higher shipping costs.

Mr Murphy’s comments came as Tesco said pre-tax profits doubled to £1.1bn for the six months to August 31, up from £551m a year earlier. Group revenues jumped by 5.9pc to £30.4bn.

Mr Murphy refused to be drawn on comments from the Conservatives this week that large businesses have become “drunk on cheap labour”. However, he insisted that retailers were investing in skills, and were a “beacon of progress” compared with other industries.

He added that Tesco had raised shop-floor wages by 30pc since 2014 and at present paid £9.55 per hour, about 7pc more than the statutory minimum wage.

He also warned that “the current business rates system doesn’t work for the country” and the tax was the most punitive in parts of the country that could least afford it.

Mr Murphy said: “This is working against the levelling up agenda that the Government has so publicly made part of its policy.”

Tesco has been calling for a 1pc tax on online sales and an overall reduction of 20pc in business rates ahead of a major overhaul this autumn.


How Tesco chief Ken Murphy beat the supply chain crisis

With Christmas soon upon us, retail bosses have been busy hiring extra boats and planes to deliver a disaster-free season amid supply chain chaos and a chronic shortage of lorry drivers.

Tesco chief executive Ken Murphy, however, already had a more cunning plan to ensure shelves were stocked ahead of the festive period.

The supermarket aims to deliver 90,000 40ft containers of goods to its warehouses via train by the end of the year, boosting its current capacity of 65,000. Tesco was one of only three retailers that relied significantly on rail freight to shift goods around, according to Murphy.

"This is a fantastic story from a sustainability point of view, but it has really come into its own, helping our supply chain resilience,” he said, unveiling Tesco’s half-year earnings on Wednesday.

“We have absolutely concrete plans in place to make sure that stock gets into stores on time and we have no plans to disappoint customers this Christmas."

The service includes five trains a week bringing fresh produce to the UK from Spain, and as of next month will include two new shifts, including one from Spain to Scotland.

The tactics do not stop there. Tesco has re-opened two distribution centres in Middleton, Manchester and Milton Keynes to support additional capacity. It has already hired 15,000 temporary workers, with another 15,000 set to be in place in the coming weeks.

“We have planned to within an inch of our lives how much we will have coming through, and how we are going to make sure we have the right number of drivers in the right place to move it,” said Murphy.

The grocer - Britain’s largest - bought 10pc more turkeys this year than it sold last year and simplified its range of popular products such as pasta to get more stock onto shelves. Non-food products sold at Christmas are already arriving in stores, with fresh items to be prioritised in the two weeks ahead.

“Ultimately, servicing Christmas in the right way is the most important thing right now in this business,” said new finance chief Imran Nawaz.

Williams Woods, an analyst at Alliance Bernstein, however, says that he was “still concerned about peak trading”.

“I don’t think the HGV driver issue is going away anytime soon. Availability could also be an issue.”

Tesco’s decision to cut some ranges - a tactic deployed at the apex of the pandemic to cope with the stock-piling crisis - could come back to bite, says Woods, as it could end up selling fewer of its more profitable, luxury products.

“That’s our fear, if you can only buy standard, they are lower [profit] margin.”

Tesco's bullishness about Christmas comes amid a chorus of smaller rivals and suppliers sounding the alarm over food shortages and containers in far flung places, yet to reach the UK. In the last few weeks, photos of empty supermarket shelves have become commonplace on social media. Tesco, however, rarely seems to feature.

Empty supermarket shelves are becoming a common sight once again around the UK - REUTERS/Peter Cziborra
Empty supermarket shelves are becoming a common sight once again around the UK - REUTERS/Peter Cziborra

One rival says that while Tesco was "excellent in logistics", the mighty grocer was also being prioritised in the queue for goods by factories eager to escape its wrath.

Murphy shot down the suggestion, saying that it had taken the chain years to build its relationships with suppliers.

“If you have the confidence to invest in their business, they make sure they have the best availability for you, particularly in moments of supply chain challenge,” he said.

“I’d like to think the reason for the better resilience during the pandemic and during the summer has much more to do with long-standing practices that we’ve built over time. You can’t do this overnight, it has taken years and years of collaboration.”

Six years ago, Tesco deliberately delayed payments to suppliers and paid them less than they were owed in an attempt to meet financial targets.

Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown, argues Tesco’s enormous scale means it has weathered the crisis better than others.

“It’s times like these when being the biggest fish in the pond really counts. The mature, deeply rooted nature of its supply relationships have been a key tool in allowing Tesco to keep its shelves well stocked, and outshining competitors in the process.

“The size of Tesco’s distribution network also can’t be overstated, which again gives the group the flexibility to deliver the goods at scale.”

Another rival speculated the supermarket deliberately puts on a brave face when it comes to supply chain woes: “They’re not interested in creating more panic buying.”

Murphy warned, however, that despite its supply chain holding up well, he expected further obstacles in the run-up to Christmas and beyond. He said Tesco was at present in a “deflationary situation”, which will allow it to keep a lid on prices - for now.

And in a bid to dampen worries, he clarified that chairman John Allan’s warning to shoppers last month that food prices could go up by as much as 5pc this winter, was about “the UK in general, and it was a hypothetical possibility, not a sense of expectation”.

A year into his job, Murphy appears to have emerged unscathed by some of the struggles his rivals are grappling with.

Nevertheless, with commodity prices on the rise and pressure on day-to-day costs, it feels inevitable that some of the pressures will have to be absorbed by consumers soon.