Tesco believes communicating with customers through marketing is “more important than ever”, as inflation accelerates to a 30-year high.
Consumer prices jumped by 7% in the year to March, up from 6.2% in February, according to figures from the Office for National Statistics this week. With consumer wallets being squeezed, brands and retailers are under pressure to keep their prices competitive.
“Tesco is at its best when it puts customers first – it’s what we did during the pandemic and it is what we will continue to do now,” Tesco CEO Ken Murphy said as the grocer published its end of year financial results today (13 April).
“Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check – working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs.”
However, Murphy told Marketing Week the grocer doesn’t see marketing as a cost to be cut.
“We don’t look at marketing as a cost, but more as an investment in communicating with our customers and this is more important than ever right now,” he said.
Tesco has been “really pleased” with the effectiveness of recent campaigns, Murphy added, from ‘Aldi Price Match’ and ‘Clubcard Prices’, to its Ramadan and Easter campaigns. The Aldi Price Match initiative has been extended to around 650 lines, while all the supermarket’s promotional deals are now executed as part of Clubcard Prices.
Our commitment is to stay really close to the customer [and] what the customer needs, and respond as we go. I think that we are as well equipped, if not better equipped than anybody else in the market to respond.
Ken Murphy, Tesco
“Customers have been responding really well to them [the campaigns] and that is helping to drive the overall improvement in our brand perception,” he said.
Indeed, Tesco claims to have achieved its highest brand net promoter score (NPS) to date, while also improving its overall brand health index score by nine basis points (bps) year-on-year. According to the grocer, its competitors’ index scores have dropped by 54 bps on average over the same period.
On a two year basis Tesco said its brand index score is up 413 bps, compared to a competitor average of 132.
On value perception alone, Tesco claims to be outperforming the market by 91 bps. The grocer has also improved its quality perception by 11 bps, compared to a market decline of 32.
In terms of market share, Tesco said it has made gains in the UK, Republic of Ireland and Central Europe, including a 30bps share increase to 27.7% in the UK. Online, Tesco has increased its share by 142 bps to 34.8%.
Looking at the year ahead, Murphy said Tesco’s insight suggests customers are already planning changes to the way they shop, but that it’s too early to predict exactly what those changes will be.‘Fiercely competitive’: Why supermarkets are committing to low prices despite inflation
“It’s early days yet [but] we are going to keep a very close eye on it, because we can see that customers are already starting to look at how they manage their budgets and they’re starting to make trade offs,” he told press this morning.
“It’s an evolving situation and it’s very dynamic. And so our commitment is to stay really close to the customer [and] what the customer needs, and respond as we go. I think that we are as well equipped, if not better equipped than anybody else in the market to respond.”
In October last year, Tesco shared the four strategic priorities the business believes will help drive top-line growth and profits over the coming years. Today, Murphy said the business has already made “good progress” on those goals.
The four priorities were providing “magnetic value” for customers, creating “competitive advantage” through the Tesco Clubcard, convenience and reducing costs.
On value, Tesco said it now claims its strongest price position in the UK in six years, while its shelf price index has improved by 70 bps since last year. This has been achieved through the Aldi Price Match initiative, with Aldi Price Match products featuring in 99% of large baskets, relaunching ‘Low Everyday Prices’ on 1,600 lines, with a particular emphasis on household and health and beauty products, and Clubcard Prices.Tesco reports ‘strong interest’ from brands in new media platform
“Thanks to our relentless focus on value over the last few years, Tesco is now a destination that customers can trust to spend less on their weekly shop,” Murphy said.
“The combination of the Price Match, Low Everyday Prices and Clubcard Prices gives our customers fewer reasons to shop elsewhere.”
However, providing magnetic value is about more than just prices, Murphy added. As such, Tesco has also made progress on offering “better quality, healthy and sustainable products”.
The grocer is continuing to reformulate its products to offer healthier choices, with 7.7 billion more calories removed over the year. Meanwhile, sales of Tesco’s own-brand premium range Tesco Finest rose 9.3% over the year, with the range supported by the grocer’s ‘Food Love Story’ campaign.
Tesco has also removed 1.6 billion pieces of plastic to date, launched the UK’s first nationwide soft plastic recycling network in March 2021 and has introduced electric vehicle charging points at 500 UK stores.
Meanwhile, Tesco claims Clubcard penetration is up 390 bps year on year, following the launch of Clubcard Prices in Tesco Express stores in May, alongside the decision to bring the price pledge to Tesco Mobile in September and Tesco Bank in October. Nine million customers now access Clubcard via the app, up from 2 million two years ago, while Clubcard households reach more than 20 million.
“We see many more ways to innovate in order to create a much richer experience [with Clubcard],” Murphy said.
Elsewhere, Tesco’s convenience strategy sees online sales remain “significantly” ahead of pre-Covid levels, at 1.2 million orders per week. Murphy noted that online sales as a percentage of sales spiked to 15.5% at the height of the pandemic and has now settled to around 13% – still well ahead of the 9% seen pre-pandemic.
We don’t look at marketing as a cost, but more as an investment in communicating with our customers, and this is more important than ever right now.
Ken Murphy, Tesco
“We’re really pleased with the resilience of our .com business and of course, that behaviour is now embedded in our customers,” he said. “I think customers are going to be really, really attached to that .com proposition.”
The grocer also added 102 new ‘Click & Collect’ sites over the year, while its ‘Whoosh’ rapid delivery service is now available from more than 200 stores, rolling out to a further 400 this year. Tesco also has a partnership with third-party rapid delivery service Gorillas.
Murphy said Tesco is seeing “really strong customer adoption” of rapid delivery and remains “curious” about how that proposition will play out.
“We’re very curious about the model in a world where restrictions have been lifted and customers are seeking value,” he said. “I have no prediction on [how it will evolve]. We’re just going to wait and see. That’s the purpose of a trial and we’ll stay close to it.”
However, Tesco’s plans to extend Whoosh to 600 stores over the next financial year is an “indication” the grocer believes “the mission is here to stay”, Murphy added.
Full year results and future guidance
Over its 2021/22 financial year, Tesco saw group sales rise 2.5% to £54.8m, a 3% increase at a constant rate. Revenue was up 6% to £61.3bn, while operating profit was up 65.5% from £1.5bn to £2.6bn.
In the UK and Ireland, like-for-like sales were up 2.2%, or 8.8% on a two-year basis.
Looking forward, Murphy said Tesco is “confident” that its strategy will enable the business to drive sustainable growth and generate strong retail free cash flow.
However, given the “significant uncertainties” of the current economic environment, Tesco has given a wider than usual range for its retail profit guidance of between £2.4bn and £2.6bn for the 2022/23 financial year.
This range will depend on a number of factors, Murphy said, including the extent of further “normalisation” in customer behaviour as the world exits the pandemic, the level of cost inflation Tesco experiences and its ability to partially offset it, and the investment required to maintain the strength of its price position relative to the market.