Tesco keen to keep suppliers on side after 'tough year'

Ken Murphy, the Tesco chief executive, is not a great one for hyperbole.

So when the Irishman describes an “incredibly tough year” for customers in which the group grappled with “unprecedented levels of inflation in the prices we have paid our suppliers for their products and the cost of running our own operations”, you can be sure he is understating things.

That was borne out in today’s results.

The UK’s leading grocery retailer reported an adjusted operating profit of £2.6bn for the year to 25 February. That was down 6.9% on the same period 12 months earlier – which the company said reflected lower sales volumes in the UK and Republic of Ireland and the impact of price cutting.

There are various ways of measuring the results and that one is the more meaningful in terms of telling you what has been going on in the business.

Tesco also reported a statutory pre-tax profit for the year of £1bn, down 50.8% on the previous 12 months, but that figure mainly reflects non-cash impairment charges on its property estate.

The pressure imposed on Tesco and its customers by inflation showed up elsewhere in the statement, not just in the bottom line, but also the top line.

While headline sales by value rose by 5.3%, to £57.6bn, sales volumes – the amount of things bought – actually fell. In other words, consumers may have been spending more, but will not have been getting as much for their money.

By way of example, in the core UK business, like-for-like sales (the measure that strips out the impact of store openings and refurbishments) were up by 0.7% during the first half of the financial year but Tesco admitted to “reduced year-on-year volumes”.

Inflationary pressures will remain this year.

Mr Murphy said he expected inflation to moderate during the second half of the year, particularly in lines like bakery, although that elevated level of inflation at the moment means the company is forecasting profits for the financial year just started to be no better than in the one just gone.

Supplier sensitivities

For retail Kremlinologists, though, all this was largely known. For them, one of the main points of interest in today’s statement was in the very amelioratory tone struck in Mr Murphy’s comments about Tesco’s suppliers.

In July last year, Tesco had a highly-publicised bust-up with Kraft Heinz after refusing to pay the price increases demanded by its supplier, resulting for a while in Heinz tomato ketchup not being supplied.

Tesco even issued a statement at the time in which it said it was not prepared to “pass on unjustifiable price increases to our customers”.

The spat probably helped burnish Tesco’s credentials as a consumer champion – but, for suppliers, it raised concerns that Tesco was slipping back to its bad old ways of the 1990s and early 2000s, when it was a notoriously aggressive negotiator, before softening its approach under Mr Murphy’s predecessor Sir Dave Lewis.

Those concerns were aired publicly when the Sunday Times reported last weekend that Tesco was beginning to push suppliers for price cuts and had also introduced Amazon-style fulfilment fees on goods sold through its website and app.

That Tesco is sensitive to accusations of beating up its suppliers was made clear today.

High up in the stock exchange announcement was a line that the company was “working with suppliers to mitigate as much inflation as possible” and a reference to the fact that its supplier satisfaction score stands at a record 86.6%.

Later in the statement there was also a reference to Tesco having topped the Advantage supplier survey – an annual survey that measures best practice between suppliers, wholesalers and convenience store retailers – for the seventh consecutive year.

This did not go unnoticed.

Clive Black, the veteran retail industry analyst at investment bank Shore Capital, told clients this morning: “Tesco raised eyebrows in its domestic supply chain, firstly through messaging from its Chair that suppliers were perhaps overinflating and then a very uncharacteristic blunder around fulfilment fees where we sense backtracking has been immense.

“We sense that there may be wry smiles on its supplier survey statement.”

Mr Murphy himself, asked later about the relationship with suppliers, said: “At a time when we have been focused on mitigating the impact of inflation, we haven’t been afraid to have direct conversations [with suppliers] when necessary in the interests of our customers.”

Happy shoppers

Those customers seem relatively happy with Tesco just now. Mr Murphy pointed out that Tesco delivered a market-leading performance during the crucial Christmas trading period and highlighted that its net promoter score is the best of the ‘full line’ grocers (as opposed to Aldi and Lidl, referred to in the industry as the ‘limited assortment’ retailers, because they do not sell as many individual lines as the traditional big four).

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Integral to that has been Clubcard, which has 11.7 million users in the UK and a further 700,000 in the Republic of Ireland, and which is apparently now used in 79% of UK sales and 77% of Irish sales.

It is incredible to think that, eight years ago, Tesco contemplated selling Dunnhumby, the data and loyalty unit that runs Clubcard, as it scrambled to shore up its finances following the discovery of accounting issues in 2014.

Not that everyone is satisfied. The Unite union issued a savage attack – presumably pre-written before Tesco revealed profits for the year had actually fallen – in which it accused the company of “excessive profiteering fired up by astonishing corporate greed” and claimed “it’s this rampant profiteering which is driving inflation”.

It was a peculiar charge to level at a company that has just announced its third staff pay rise in 10 months and which only this week laid out its inflation-fighting credentials with its first cut in the price of milk in three years.

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