Tesco has reported impressive progress against key financial metrics in its newly released 2018/19 results, with strong growth in group sales driven by a resilient performance in the core UK business and strong trading at Booker.

Headline results

• Group sales: £56.9bn (+11.5%) +1.4% LFL
• UK & ROI: +2.9%, with Tesco UK +1.7% and Booker +11.1%
• Central Europe: -2.3% LFL (impacted by fewer trading days and less general merchandise)
• Asia: sales -6.2% LFL (with improvement to -3.0% in Q4)
• Group operating profit: +34% to £2.2bn, inc. UK & ROI +45.1% to £1.5bn and Booker £196m
• Group operating margin 3.45%, with H2 3.96% (3.79% excl. Booker), putting Tesco on track to meet 3.4 - 4.0% ambition by 2019/20

Strong progress in UK & Ireland   

Tesco achieved its third full year of growth in the UK and Ireland with LFL sales up by 2.9%, helped by improvements to quality and value perceptions.  Key here has been Tesco's continuing focus on upgrading its private label range, including the rollout of eight exclusively at Tesco brands such as Ms Mollys and Hearty Food Co.  Tesco has also been successful in driving growth through selected general merchandise categories with the Home category up 4.2% and LFL clothing sales up 3.0%.

All store formats achieved growth, with particularly strong growth from convenience (including the One Stop business), and 2.8% growth in online grocery. The new Jack's discount fascia has seen a strong customer response and now has nine stores open. Booker maintained double digit LFL growth, helped by a strong performance from symbol group stores.

Sales decline in Central Europe

A planned reduction in unprofitable non-food sales including non-participation in Black Friday activity impacted LFL performance by 2.3% in Central Europe while changes to Sunday trading regulations and the creation of a new public holiday in Poland further impacted trading.

Strategy shift in Asia

In Asia, Tesco implemented significant changes to its sales mix and promotional strategy, particularly in the first half and these helped to improve the LFL sales trend to -3.0% in the fourth quarter. The impact of the issuance of government welfare cards in Thailand also eased through the year. Despite the sales decline, Tesco's margin remained strong at 5.9%, twice the rate of other regions.

Progress ahead of expectations

Commenting on the results, Group CEO Dave Lewis said:

“After four years we have met or are about to meet the vast majority of our turnaround goals.  I’m very confident that we will complete the journey in 2019/20.

I’m delighted with the broad-based improvement across the business.  We have restored our competitiveness for customers - including through the introduction of ‘Exclusively at Tesco’ - and rebuilt a sustainable base of profitability. The full year margin of 3.45% represents clear progress and the second half level of 3.79%, even before the benefit of Booker, puts us comfortably in the aspirational range we set four years ago.

I’m pleased that we are able to accelerate the recovery in the dividend as a result of our continued capital discipline and strong improvement in cash profitability.”

 

Growth slowed to 1.4% in the 12 weeks to 24th March, according to Kantar. This makes it the slowest growth rate since March 2018. Inflation edged up from 1.4% to 1.5% causing implied volumes to dip into negative territory. We look at the results in more detail.

Seasonal changes impact growth

Despite the uncertainty surrounding Brexit challenges have mainly come for retailers from changes to the timing of seasonal events. Retailers have been impacted by Easter being much later in 2019, falling on the 19th April, compared to the 1st April in 2018. Mothers Day also fell outside this period on 31st March, compared to 11th March in 2018. This impacts the Big Four in particular, who rely more heavily on these events to boost to trading.

Asda becomes the second largest retailer

Asda has overtaken Sainsbury's and become the retailer with the second largest market share, at 15.4%, compared to Sainsbury's at 15.3%. Asda sales continue to grow, albeit at a marginal rate of 0.1%. However this is positive, especially when compared to Sainsbury's whose sales were down -1.8% year-on-year.

However, these results do not show the full picture. Sainsbury's is still ahead of Asda in terms of total sales. The sales measured by Kantar only cover food and grocery, but not Argos and Habitat.

Helping to drive Asda's recovery is the retailer's success in reaching more quality seeking shoppers, with investments in fresh produce and its own brand offer broadening its appeal to more affluent demographics. To see how Asda is transforming the in-store experience, check back soon on our Asda hub to see our store visit report to newly remodelled Asda Patchway.

Divergent promotional trends at Waitrose and Tesco

Waitrose saw its strongest growth since August 2018, at 1.3%. This was driven by the retailer reducing its promotional activity and focusing more on full price sales.

Waitrose's scaling back of promotions contrasts with Tesco whose deal penetration reached 40.1% in Kantar's data.  Overall however promotions in the grocery market are at the lowest they have been in a decade.

Tesco full year results will be reported on our Tesco hub on April 10th.

Fastest growth from discounters

The discounters seem to be unaffected by the seasonal date changes and growth remains strong. Particularly for Aldi which was the fastest growing retailer at 10.6%, reaching a record market share of 8%.

This period saw Aldi launch a new banner, Aldi 'Local'. The retailer has said this is not a move into the convenience sector. As expansion in city centres and particularly London, is often difficult for discounters, innovation in small formats gives them more opportunity to grow presence in these areas and target shoppers on different missions.

Lidl also continues to grow, as the second fastest retailer, at 5.8%. This was a 0.4pp increase on the 12 weeks up to February 24th.

This means the two discounters’ overall market share is now 13.6%.

Co-op and Ocado launch new online services

Growth at Co-op, at 3.9% and Ocado at 5.5% remains strong, despite disruption caused by the recent fire at its Andover CFC. We have recently seen both retailers look to move into online 'top-up' shopping.

Co-op has launched its first online delivery service. It is initially available to shoppers within a 2.5 mile radius of a Co-op store on the Kings Road in Chelsea, with plans to be rolled out to a further eight stores in London, and if successful, the rest of the UK.

Ocado has launched a new one hour delivery service called Ocado Zoom which is available in selected postcodes in West London.

Other retailers

• Morrisons growth has stagnated, with sales down -0.1%. This is the first time it has had negative results since December 2016. The retailer has been attracting more shoppers however, has seen a decline in basket size and Kantar's numbers do not include Morrisons fast growing sales through wholesale partners, including McColl's and Amazon. Read our new strategic outlook for Morrisons to find out more about its recent annual results plans for 2019.
• Iceland saw sales growth of 0.6%, maintaining its market share of 2.1%.

Retailer	12 weeks to 25th March 2018	12 weeks to 24th March 2019	Sales growth (Y-O-Y%)
Tesco	27.6	27.4	0.5%
Sainsbury's	15.8	15.3	-1.8%
Asda	15.6	15.4	0.1%
Morrisons	10.4	10.3	-0.1%
Aldi	7.3	8.0	10.6%
Co-op	6.0	6.1	3.9%
Lidl	5.3	5.6	5.8%
Waitrose	5.0	5.0	1.3%
Iceland	2.1	2.1	0.6%
Ocado	1.2	1.3	5.5%
Other Multiples	1.8	1.8	2.7%
Symbols & Independents	1.7	1.7	0.6%

 

 

We look in more detail at how Tesco is trialling removing plastic packaging in some of its fruit and vegetables.

Plastic-free for 45 products

In an effort to reduce plastic waste Tesco has launched a month-long trial to remove plastic packaging on a selection of its fruit and vegetables. The trial will take place in its Watford and Swindon stores. The plastic packaging will be removed from 45 products where loose alternatives are available.

Source: Tesco Extra, Watford, IGD ResearchTesco Extra, Watford, IGD Research

 

Tesco announced in 2018 that it would ban hard-to-recycle plastic packaging by 2019, ensure all paper and board used is 100% sustainable by 2025 and make all packaging fully recyclable by 2025. This is all part of its ambition to get to a closed loop packaging system and achieve zero waste. To do this Tesco also wants to improve recovery and recycling, working with the government on a national recycling infrastructure. Alongside this is will be working to raise awareness in order to change shopper behaviour.

Source: Tesco Extra, Watford, IGD ResearchTesco Extra, Watford, IGD Research

 

Speaking at the IGD 2018 Tesco Business Update Jason Tarry, chief product officer said;

"To complete the journey to a closed loop approach, we stand ready to work with government to reform the current approach to recycling in the UK."

Source: Tesco Extra, Watford, IGD ResearchTesco Extra, Watford, IGD Research

 

The movement towards plastic-free is positive in many ways, not just that it is good for the environment. As shoppers become more conscious of the impact retailers are having, taking action to show responsibility in this area is becoming more important for maintaining a positive image. It also looks good in store and is convenient for shoppers as they can buy the exact quantity they want. However, there is a risk of damage to products and potential for it to create a messy environment. Tesco will need to manage the stock effectively to ensure no significant damage to products, and that there is none left over that shoppers will not buy.

Other retailers action on plastics

Retailers are continuing to reduce their plastic usage. Aldi is currently trialling going plastic-free on five fruit and vegetable lines in Scotland. It has also announced it will be removing plastic glitter from 100% of its private label products by 2021. Waitrose has also committed to being plastic glitter free by Christmas 2020.

Read more about how other retailers such as Iceland, M&S, Morrison's and more are taking action on plastics.