Tesco recovery spells bad news for Asda and Morrisons

Britain’s biggest grocer has returned to profit and achieved its first quarter of sales growth in over three years.

The supermarket giant reported bottom line pre-tax profits of £162m for the year to February 27 against losses of £6.3bn the previous year.

Despite being hemmed in on all sides by ruthless competition and food price deflation, analysts said Lewis has shown both skill and vision.

John Ibbotson, director of Huddersfield-based retail consultancy Retail Vision, said: “Yes the turnaround is painfully slow, but for the Tesco behemoth to have begun its pivot without hitting the rocks is a huge achievement.

“For a brand that last year posted the largest ever loss on the UK high street, the return to sales growth for the first time in more than three years feels like a transformation.”

Analyst Clive Black at Shore Capital said Tesco has reported material steps forward on a road to recovery and, hopefully, a better place for its investors.

Taking the oil tanker metaphor one step further, he said: “We believe that Dave Lewis, the group’s likeable CEO, deserves considerable credit for steering this near retail shipwreck to calmer waters, where the group’s ‘engineers’, can and are now making progress.”

UK fourth quarter like-for-like sales rose 0.9 per cent, marking a return to positive territory for the first time since 2013.

Analyst Bruno Monteyne at Bernstein said: “This is a great update from Tesco looking backwards: solid sales and volume growth, and marginally beating consensus.

“However, the guidance for profits next year is disappointing: Tesco is not really guiding for profit improvements but for profit stagnation despite the tail winds from buying back leases.”

Mr Ibbotson added: “Much more work – and pain – lie ahead. Better service and brutal price cuts have won back customers and boosted sales, but the cost has been to the bottom line. Tesco’s profits are now less than a quarter of the £4bn achieved just four years ago. But with all the major grocers dropping prices and a backdrop of food price deflation, a quick turnaround was never going to be possible.”

The challenge now for Tesco is to keep up the momentum and stay in the game whilst maintaining market share.

Mr Ibbotson believes that Tesco’s vast size is an advantage as it allows the retail giant to keep down prices for longer than its rivals.

“In the current war of attrition, this could prove a decisive factor,” he said.

“Dave Lewis has made some tough decisions, stopped the rot and halved the decline in Tesco’s market share.“

However, its rate of growth is still paltry compared with Sainsbury’s and the discounters and the future promises low profits and slow sales growth.

One thing is for sure, Tesco’s renaissance spells bad news for Leeds-based Asda and Bradford-based Morrisons. Asda is refusing to get drawn into the price war and it is losing sales as a result as it focuses on profits. At Morrisons, CEO David Potts is masterminding a return to what once made Morrisons unique – cheap prices on quality products.

The big question is whether consumers are going to start splashing out on grocery shopping now that the worst of the economic downturn is over and people have more money in their pockets.

Asda’s Income Tracker research suggests that people are spending their extra money on new cars, holidays and cinema trips and that the days of splurging at the supermarket are over.

As Tesco’s share price fall shows, the big four supermarkets have a long and weary road ahead of them and chances are that the profits of the past will never return.

However, this is great news for the consumer who paid over the odds in previous years to line the grocers’ pockets.