Holding on to customers in a cost-of-living crisis is no joke, even for a company with the scale and purchasing power of Tesco. The company is having to take a hit on profit and margins to keep the tills ringing and customers heading through its doors.
This hit is even more acute because Tesco is itself exposed to higher labour and energy costs. Online groceries, which finally started to make a positive contribution during the pandemic will also be heavily impacted by smaller basket sizes as the costs for Tesco of delivering the goods don’t change in proportion to the amount ordered.
AJ Bell’s Russ Mould said: “Tesco seems to be making the calculation that it can absorb some pain now to maintain and even improve its market share, particularly from the German discounters Aldi and Lidl, and emerge in a stronger position once the economic outlook starts to pick up.
“There is merit to this strategy, particularly at a time when rivals, most notably Morrisons, are really struggling and don’t have Tesco’s financial strength.
“What Tesco doesn’t want to be drawn into is a race to the bottom on prices which cuts margins right to the bone for a prolonged period. For now, this is the tricky tightrope the supermarket must walk, while rewarding investors for their patience with steady dividends.”