Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
There are very few, if any, areas of life the pandemic hasn’t affected in one way or another. And there have been very few businesses, if any, that haven’t been forced to adapt if they were to have any hope of surviving the past year.
Tesco (TSCO) is one and today’s full year results lay bare both the cost and the catalyst for change that the past year has brought about.
The supermarket group’s online sales soared. They rose by 77% during the year to £6.3 billion, after it doubled capacity to 1.5 million home delivery slots a week. That meant that overall group sales rose by 8.8% to £53.4 billion during the 52 weeks to 27 February, beating even analysts’ expectations.
Home deliveries accounted for 79% of internet orders at the supermarket over the period, with click and collect increasing from 11% at the start of the year to 25% by the end of it.
To deal with increased demand for online orders, the group opened a new urban fulfilment centre at its West Bromwich superstore during the year, just one of the initiatives hailed by chief executive Ken Murphy, as evidence of Tesco’s “incredible strength and agility” during the pandemic. And a second new fulfilment centre is due to open in May from its superstore at the Lakeside retail park in Essex.
That’s all part of the upside story though. The supermarket’s reality check came from costs associated with Covid. It took a total of £892 million of extra costs in the UK to carry on doing business during the pandemic, including the cost of hiring more staff to cover employees who were off work as a result of illness or self-isolating. And that near-20% fall in profits to £825 million shows the overall impact.
Part of those costs though include £535 million to repay the business rates relief it, along with other companies, received from the government. Many of the larger, profit-making companies have already pledged to repay the money to the government and Tesco had little choice but to do so after having the means to pay out £315 million to shareholders in the form of dividends in October.
All in all, over the past year, the group's sales excluding fuel increased by 7%, buoyed up by those runaway online orders. That is not as bad as a fall in sales, but isn’t as much as you might have expected, considering supermarkets have remained open throughout and the British public have had very few other outlets to spend at when it comes to satisfying their eating and drinking needs, with pubs and restaurants closed for the large part.
Sales at its wholesaler Booker, which supplies pubs, restaurants and cinemas, saw - unsurprisingly - a 40.8% drop in sales in the past year. Ironically though, the concern now is that with pubs and restaurants reopening, the past year fortunes of Tesco and Booker could be reversed.
The pandemic undoubtedly forced customer behaviour to change. Tesco noted that, with shoppers visiting its stores less frequently, but filling their baskets with about 50% more items when they did. The question is whether that behaviour continues, and the ‘traditional’ weekly shop becomes the norm again, or we revert back to ‘as and when’ convenience shopping.
But also let us not forget Tesco’s biggest nemesis, the German discounters. Every major supermarket brand has shown it is aware of the need for competitive pricing. Even Waitrose and Marks & Spencer have launched their own essentials/basics ranges to satisfy price-conscious shoppers. Now, with the end of the furlough scheme on the horizon, and with it a potential rise in unemployment, along with a hike in inflation, Tesco could find itself in an increasingly crowded space, with the likes of Aldi and Lidl only making matters worse.
While what happens next remains to be seem, Tesco said its best estimate is that its retail operating profits will recover to a similar level to where they were at in the year before the pandemic hit.
Shareholders have little to complain about though. A final dividend of 5.95p a share has been proposed, which will take the annual pay out to 9.15p a share, which is the same as the year before the pandemic.
More on Tesco
Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
Share this article
Where next for Kingfisher shares as Screwfix-owner gives update?
Can the lockdown DIY frenzy sales boom persist in a re-opened world?
Stop worrying about a crash: the bull market has further to run
Should investors really worry about inflation, Covid and US tapering?
Where did UK consumers spend their money in August?
The UK ventured out last month as retail sales fell