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.
With a three-item buying limit on flour, dried pasta, toilet roll, baby wipes and anti-bacterial wipes reintroduced at Tesco (TSCO) stores you could be forgiven for feeling like we’ve lost six months and gone back in time to March.
With the reintroduction of new restrictions too on lives and livelihoods on an almost daily basis, the autumn of 2020 is starting to look all too familiar - and not in a good way. The one thing that hasn’t changed is that the pandemic is still very much in control of what we can and can’t do in our daily lives and with everyone as undoubtedly keen as last time around not to run out of loo roll (I wonder if anyone actually did?) an element of panic-buying appears to have returned.
That, of course, should spell good news for the supermarkets that have seen floods of shoppers stocking up like it’s Christmas. In fact, even better than if it were Christmas.
In the week to 22 March, just before (the first) lockdown began, households spent more than £10 billion on groceries — more than they usually would in the run-up to Christmas — according to Kantar.
That meant that the UK’s largest supermarket, Tesco, saw sales increase at a faster rate than discounter Aldi for the first time in a decade. In the 12 weeks to 16 May, Tesco’s sales rose 11.7%, according to Nielsen, while sales at Aldi, the larger of the two German-owned discounters operating in the UK, rose 10.1%.
However, while the number of shoppers and the sums spent looked like all Tesco’s Christmases had come at once, the unexpected surge in spending and a run on the shops saw shelves stripped and online shopping portals overwhelmed. Huge sums had to be spent on drafting in extra shop staff to meet demand and also cover for staff sickness and quarantine. Even larger sums were thrown at beefing-up the online shopping portals as quickly as was feasibly possible, in order to meet demand as shoppers switched their habits and spending patterns, almost overnight.
Giving an update on Q1 trading, back in June, Tesco warned that retail operating profits are likely to be flat this year, because of that rise in costs.
Tesco has certainly done its bit to keep Britain’s workforce employed. It has effectively doubled the number of orders that can be dispatched in a week, to 1.2m by hiring thousands of extra pickers and van drivers. It has created 16,000 permanent roles to support what it described as “exceptional growth” in its online business. The new positions are in addition to the 4,000 already created since the start of the pandemic and include 10,000 pickers to assemble customer orders and 3,000 drivers to deliver them, plus a variety of other roles in stores and distribution centres. Covid has proven to be an ongoing battle and while Tesco, and indeed all the supermarkets, were caught off guard by the first wave, they have since had time to adjust to higher levels of demand and introduced significantly expanded online delivery capability.
That has forced a radical re-tuning of its wider business strategy too. With the shift to online sales taking precedence, Tesco has taken the decision to pull out of Poland, its largest European market, and in doing so, effectively pulled the plug on its global ambitions.
The UK supermarket chain has agreed the £181 million sale of 301 stores in Poland, their associated distribution centres and local head office to Salling Group, a privately held Danish company that owns the Netto discount chain. The sale should prompt an immediate improvement on the balance sheet though, as the stores included in the deal made a £107 million loss before tax last year.
While all the focus has been on the domestic supply chain and online shopping issues the Poland sale in fact marks another step in Tesco’s retreat from its international ambitions. In February, the company had sold its joint venture in China for £275 million to its state-run partner China Resources Holdings. That was followed in March by the sale of its south-east Asian operations to a Thai conglomerate for $10.6 billion, in a deal - which including more than 2,000 stores, was the biggest in Thailand’s history - expected to fund the virtual elimination of Tesco’s pension fund deficit and could pave the way for a substantial return of capital to shareholders some time in 2021.
As the UK’s largest supermarket, Wednesday’s forthcoming half-year results will be closely watched; not just for an indication of how the group is coping with the current wave of the pandemic, but also as to whether the costs associated with it have materially and permanently changed its ambitions going forwards.
Back in June, Tesco also warned of write-downs at its banking division. Losses at the banking division were expected to amount to between £175 million and £200 million, after Tesco upped its bad debt provision. At the time it said that its most up-to-date estimate of incremental costs for the UK for the full year came in at around £840 million, but that would be partially mitigated by business rates relief of £532 million and a contribution from additional food sales. The costs relating to the pandemic have been significant and indeed are ongoing and have clearly only been partly offset by business rates relief and increased sales. Investors hoping the upside of the pandemic would be shoppers’ need to feed themselves would boost the supermarket chain‘s coffers in a way never seen before will probably be disappointed.
The threat of Aldi and Lidl also remains - especially now that the German discounters, who have never before toyed with the concept of online shopping in the UK, have started to trial it in parts of the country.
Tesco may well be holding onto its number one spot in the supermarket ranks for now, but the all-important Christmas period is ahead and so are many more months of uncertainty. With the ongoing pandemic and also highly likely Brexit disruption both firm fixtures on the 2021 calendar, Tesco will be hoping that every little really does help.
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. 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. 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 an authorised financial adviser.
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