Tesco reports lower sales as soaring inflation leaves retailers and consumers struggling

As the cost of living crisis unfolds in the UK, driven by decades-high CPI inflation and soaring energy and fuel prices, Brits have been cutting down on groceries and retail spending. As a result, the retail sector has suffered, with the latest disappointing update from Tesco following weakness at Ocado and the near-collapse of McColl's, soon to be taken over by Morrisons

Tesco

Tesco's Q1 update today revealed declining sales in the UK and Ireland, by 1.5% and 2.4% respectively. Despite this, sales grew 9% in Central Europe and Tesco managed to pick up 37bps of market share in the UK from low-cost retailers. CEO Ken Murphy said the company has maintained a "laser focus on value" to counteract the effects of inflation. Tesco's "Aldi Price Match" ensures the company matches Aldi's prices across over 600 basic items.

Murphy commented during a call: "Inflation is very real for everyone. Where it is being passed on, our aim is to ensure it’s a little bit less and a little bit later than the rest of the market."

In the Q1 update release, Murphy further stated: "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. 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."

Such changing behavior includes switching to store-brand versions of essential food items, and asking cashiers to stop scanning items past a certain total.

Fuel prices are also surging amidst the crisis in Ukraine. Tesco saw prices soar by 44c in Q1, with Murphy commented during the call: "I see no signs at this stage that there will be an easing of the pressure on fuel prices".

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Ocado and McColl's

Other retailers have not been spared. In a trading update issued 25 May, Ocado reported that it has lowered its growth projection to low single digits vs. previous expectation of 10% in light of the cost of living crisis. Furthermore, it reported a grocery sales decline of 4-5% in recent months compared to a year ago during peak Covid restrictions, including a decline in online grocery sales of 20% YoY as shoppers head back to stores. Ocado reported customers ordering 1-2 fewer items per shop, resulting in the value of the average basket being 9% lower YoY.

In related news, McColl's become insolvent last month and is being taken over by Morrisons. Luckily, it appears all 16,000 threatened jobs will be saved in the deal. McColl's came to market in 2014, but struggled to compete, and the current crisis put the final nail in the coffin for the retailer.

Effect on consumers and BoE response

A BBC-commissioned survey found that 56% of 4,011 people surveyed had bought fewer groceries, with the same proportion saying they had skipped meals. The data found people have also cut spending on clothes and socialising, with some reporting their mental health has been affected as a result. Two-thirds indicated recent government aid has been insufficient. 

These results are unsurprising given prices have risen at their fastest rate in 40 years and wages have not kept up, and the situation could further worsen, with the Bank of England predicting that inflation could reach a staggering 11% in October. This will coincide with the next lifting of the energy price cap, speculated to be as high as a 50% increase. In response, the BoE raised interest rates by 0.25% yesterday to 1.25%, a modest increase compared to the Fed which raised rates by 0.75% on Wednesday. Even the Swiss Central Bank raised its rate by 0.5% in a first since 2007. The BoE is expected to take further action with current expectations being at least a 0.50% increase over the next 2 meetings.

We have been reporting on the energy crisis in Britain and related effects on markets and companies, including companies developing innovative solutions to help homes and businesses lower energy usage, including Zenova, NetScientific and eEnergy. The larger cost of living crisis has left British consumers and businesses struggling against price pressures not seen in four decades. Follow our coverage as these events unfold and markets adapt to soaring CPI and changing conditions in the energy and retail markets.