Shoppers are being forced to cut back as rising prices squeeze UK households, Tesco (TSCO.L) has warned.
Chief executive Ken Murphy said the supermarket was seeing “some early indications of changing customer behaviour as a result of the inflationary environment” amid “unprecedented” increases in the cost of living.
The retailer reported a greater-than-expected 1.5% decline in like-for-like UK sales against strong lockdown trading last year.
“Although difficult to separate from the significant impact of lapping last year’s lockdowns, we are seeing some early indications of changing customer behaviour as a result of the inflationary environment,” Murphy said.
“Customers are facing unprecedented increases in the cost of living and it is therefore even more important that we work with our supplier partners to mitigate as much inflation as possible,” he added.
Inflation has soared to a 40-year high of 9% in April as food and energy prices spiralled, escalating the cost-of-living crisis. The Bank of England is now forecasting that it will 11% this autumn, when energy bills rise.
Meanwhile, fuel sales soared by 44% to £2bn as Tesco witnessed a surge in petrol and diesel prices.
Murphy said: “I see no signs at this stage that there will be an easing of the pressure on fuel prices.”
Tesco shed 0.9% after it warned inflation was denting consumer shopping habits.
The supermarket chain said that like-for-like group sales increased by 2% to £13.6bn over the 13 weeks to March 28, compared with the same period last year. This represented a 9.9% increase against pre-pandemic levels from 2019.
Online sales in the UK have dropped by 14.5% compared with a year ago.
Like-for-like sales fell 2.4% in the Republic of Ireland over the quarter.
Tesco added that it has grown its market share against key grocery rivals after driving investment into value-focused promotional campaigns, such as its Aldi Price Match programme.
As the UK’s biggest supermarket chain, Tesco has over a quarter of the country’s grocery market.
Freetrade senior analyst Dan Lane said Tesco faced a growing threat from discount retailers Aldi and Lidl, as customers seek out cheaper options.
“Describing a ‘changing customer behaviour’ is as far as Tesco will go today but that almost certainly means shoppers are trading down and tackling the cost of living in the supermarket.
“Ken Murphy will hope his cocktail of Aldi Price Match, Low Everyday Prices and Clubcard Prices will keep customers around but it’s the first of that list that’s key now.
“Aldi Price Match will become even more important as long as customers are forced into real discount mode. Tesco experimented with its own cheap chain in Jack’s and it just didn’t work, so it’s clear that keeping its ranges wide and its prices low has to be the strategy now.”
Alex Smith at Third Bridge said Tesco will need to use its market position to negotiate down prices with suppliers.
“Tesco is attempting to be the last of the big UK supermarkets to pass on inflation costs to customers as it looks to gain market share and use its scale to manage costs. It is also expanding the number of lines in its successful Aldi price match campaign,” he said.
“Tesco’s market leadership gives it more bargaining power to negotiate down prices with suppliers. However, its relatively limited product range and fragile reputation means it can’t push negotiations too far,” he added.
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