Yahoo Finance Tesco has it tough enough already without a no-deal Brexit
When Tesco reports first-half results on Wednesday there will be less than a month to go until the Brexit deadline on 31 October. The law says the government must seek an extension if no deal is agreed by 19 October but Boris Johnson and his allies are trying to find ways around this.
Tesco’s results will be an opportune occasion to ask Britain’s biggest grocer what preparations it has made for trade outside the EU and what the risks are for the country’s food supplies.
Britain imports about half its food and 30% comes from the EU. The British Retail Consortium has warned that checks in France could delay deliveries of perishables such as fruit and vegetables. The government’s Operation Yellowhammer documents predict reduced supplies of certain fresh foods, causing price rises that would affect the most vulnerable.
Crashing out of the EU would create problems for Tesco, its chief executive Dave Lewis has said, because it would introduce a hard border between the UK and its neighbours.
“When we pick a lettuce, say in Spain, it has five days of life. Now, we can have it on a shelf within 24 hours so we can offer a customer four days of life,” Lewis told the Daily Mail in July. “If that lettuce has to stand two days at the border, I’m not sure we can put it on a shelf, and that is not good for us.”
Two further problems for supermarkets from leaving with no deal are the impact on consumer confidence and the value of sterling. Households have kept spending during the political tumult but confidence is fragile and would surely be upset by the upheaval of no deal. The pound has dropped 14% against the euro since the 2016 referendum, making imported goods more expensive. Another sharp fall would force grocers to decide whether to take the hit or increase prices.
The Brexit deadline at the end of October, which has been extended from the end of March, also couldn’t be much worse for supermarkets. It threatens disruption just as they are gearing up for the Christmas trading period. Logistically, the timing is a nightmare too because warehouses will be full of Christmas items.
For Tesco and the other big supermarkets – Sainsbury’s, Morrisons and Asda – things are tough already. They are leaking customers to the German discounters Aldi and Lidl and are being forced to cut prices. The last thing they need is a collapse in consumer confidence and a margin-squeezing drop in the pound.
Russ Mould, investment director at stockbroker AJ Bell, said: “People are concerned that the supermarkets are running to stand still on sales growth and margins in their response to the discounters. Brexit is an unknown. In theory they have had three years to think about alternative sourcing but the question is, if sterling falls, do they swallow that or pass it on to the consumer?”
Since taking over five years ago Lewis has cut costs and scrapped thousands of jobs while reducing prices. He has also bought the cash-and-carry group Booker and is experimenting with new formats such as budget chain Jack’s, which last week announced the closure of a store.
Tesco is in better shape than when Lewis joined to find a £326m hole in the company’s accounts. On average, analysts expect pre-tax profit to rise 14% this year to £1.9bn. The biggest risk to that result is Brexit.
Clive Black, an analyst at stockbroker Shore Capital, said: “We can’t deny total uncertainty … as to what, if any, waves may ripple for the group’s earnings around the UK’s exit from the EU. What could possibly go wrong?”
