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There can be little doubt that Tesco (TSCO) will have had a bumper Christmas trading period.

The sales figures already in from two of Tesco’s main competitors, Sainsbury’s and Morrisons, suggest it too will be posting a decent rise in Christmas and new year sales, when it gives its third quarter and Christmas trading update on Thursday.

With sales booming at all the supermarkets, they seem to be keen to shift attention to their ability to have fended off the worst of the pandemic.

A month ago Tesco announced that it would be paying back the £585 million in tax relief from the UK government given at the start of the pandemic.

Tesco said it had decided to pay back the business rates relief because its operations had proven resilient and some potential risks had passed. The company said that back in March, food retailers faced potentially disastrous outcomes, such as panic buying, supply problems and mass absences from work.

'While business rates relief was a critical support at a time of significant uncertainty, some of the potential risks we faced are now behind us,' chief executive Ken Murphy said.

You do have to ask though whether that decision may have been a little premature, in light of the fact that we have since gone back into another full national lockdown, seen signs of a return to panic-buying and were, albeit temporarily, facing supply chain issues as the Brexit deal looked in danger of not materialising until the eleventh hour. And let’s not forget the lorry park that Kent became over Christmas as France closed its borders to protect itself against the spread of the new Covid variant.

The decision to repay the money will have a financial impact on Tesco’s bottom line. The repayment, which is equivalent to more than its pre-tax profits in the first half of the year, will carry a full-year cash impact of £535 million. A further £50 million is set to be returned next year.

The group made the decision despite putting “every penny” of the rates relief towards its pandemic response. This year’s Covid-19 related costs are expected to hit £725 million, the supermarket said in October.

However, perhaps it felt it had no choice. With soaring sales at a time when so many other businesses are on their knees, and with the added pressure from The Sunday Times, which quoted figures from advisory firm Altus, suggesting supermarkets were in line to benefit to the tune of up to £1.9 billion from the 12-month holiday on business rates, it presumably felt it had little choice.

Not to be outdone, and clearly keen to make sure that Tesco didn‘t get all the brownie points, Sainsbury’s (SBRY) which wasn’t due to post its Christmas trading update until next Wednesday, jumped the gun and announced a strong third quarter and Christmas performance alongside news that after forgoing business rates relief of £410 million it now expects to report underlying profit before tax of at least £330 million in the financial year to March 2021, down from £586 million in March 2020. The ‘model corporate citizen’ award therefore currently sits with Sainsbury’s.

We will have to see what Tesco pulls out of the bag on Thursday. But sales should be impressive. With a greater proportion of its sales online sales than any of its traditional supermarket rivals, bar Ocado’s unique model, Tesco is arguably in a strong position. But that isn’t to say it doesn’t have its own demons to deal with.

We probably won’t get anything much on its Tesco Bank operations, but these are proving to be a continual drag on its bottom line; diving into losses in the first-half and expected to deepen by the year end.

The battle for customer loyalty and sales remains fierce and while its under-performing Thai business will soon be gone, having recently been approved for sale to CP Group, Thailand's largest private company by the country's antitrust regulator, the Office of Trade Competition Commission, it still has its Malaysian and Polish businesses to sort out, along with the banking business.

Newly-incumbent chief executive officer Ken Murphy has a tough job on his hands and big shoes to fill. Tesco is still a big, heavy ship that will need some expert navigation through potentially stormy seas ahead.

More on Tesco

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Topics covered

Active investing; Shares; UK

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