Tesco concedes rising food prices are causing a ‘resurgence’ at the discounters

Despite reporting its first annual sales growth in seven years, Tesco’s CEO Dave Lewis is aware food inflation could force the resurgent brand to make some bold changes.

Tesco returned to sales growth for the first time since 2009/10 in 2016, with like-for-like sales at its core UK business increasing by 0.9%. Pre-tax profits for the year to 29 February 2017 fell 28% to £145m; a decline that reflected one-off costs it had to make to conclude a separate probe into its 2014 profits scandal.

On balance the results are good news for Tesco, with some analysts claiming they complete a turnaround chief executive Lewis has steered since joining the business back in 2014. However, Tesco isn’t out of the woods yet, with Brexit-fuelled food inflation expected to cause complications over the rest of the year.

The price of everyday groceries rose by 2.3% year on year over the 12 weeks ending 26 March, the highest rise for more than three years, according to Kantar Worldpanel. The increase meant the average household spent an additional £21.31 on their grocery shopping over the 12-week period, with the research firm predicting a further rise in food inflation.

READ MORE: How Tesco’s £3.7bn Booker deal will impact its brand

When asked by Marketing Week whether a rise in food prices could mean Tesco loses customers back to the discounters – who will be less affected by price inflation due to their simpler supply chains – Lewis replied: “We know the level of price inflation in a basket at Tesco, relative to the rest of the big four, is the lowest. Having said that, it is fair to say that since the turn of the year, we’ve seen and are aware of a resurgence in growth at the discounters.

“We must think about whether that’s temporary or something more significant, and I believe Easter – an occasion where consumers typically trade up at larger stores – will be a great indication on whether there’s been any fundamental shifts.”

He seemed to hint that should Easter work in the favour of Aldi and Lidl, Tesco’s brand messaging, which has been focused a lot on food quality over recent months, could revert back to being more price-focused.

It is fair to say since the turn of the year, we’ve seen a resurgence for the discounters [due to inflation]

Dave Lewis, CEO, Tesco

“At the minute we are competitive with everybody else in terms of real inflation, but if there is change in this dynamic past Easter then we will have to think if we need to change our approach as a brand and as a business.”

Lewis, who was speaking today (12 April) at a press briefing around Tesco’s annual results, boasted of the supermarket giant’s status as YouGov BrandIndex’s ‘most improved brand’ for 2016.

In particular, he said perceptions around Tesco’s food quality had “shot up” and that this had contributed as 107 of its larger hypermarket stores returning to profitability. These 107 superstores represent two-thirds of the unprofitable space Tesco targeted for improvements at the start of the financial year.

Central to Tesco’s turnaround has been the brand mantra of ‘Serving Britain’s shoppers a little better every day,’ a crucial brand positioning given the low quality perceptions Lewis inherited when he took on the job.

But when asked whether this positioning must now evolve given Tesco has now returned to annual sales growth, Lewis responded sharply: “Definitely not. We will keep it exactly the same. It isn’t a turnaround mantra, it is the purpose of the entire organisation.

“It wasn’t written by me but by the colleagues. It isn’t a short-term thing but an ongoing commitment as a business and crucial to our growth.”

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