Tesco sets out new strategic focus following 2020 sales surge

Date : 14 April 2021

Nick Gladding

Senior Retail Analyst

Tesco has outlined how it plans to focus more on value, loyalty, online and sustainability following the release of exceptional full year results. In this article we look at Tesco's progress over the past year and current areas of focus for the business.

Headline results

  • Group sales: +7.1% to £53.4bn (+7.0% at constant exchange rates)
  • UK & Ireland LFL sales +6.8%, (H1 +7.2%%, H2 +6.5%)
  • Tesco UK LFL +7.7% (H1 +7.6%, H2 +7.8%)
  • Booker LFL sales -0.8% (H1 +2.2%, H2 -4.0%)
  • Central Europe LFL -0.4% (H1 -0.9%, H2 +0.1%)
  • UK and ROI operating profit: £1,866m (-13.5%) but +11.4% after excluding foregone business rates relief
  • Group operating profit pre-exceptionals -28.1% to £1.815bn (excluding amortisation of acquired intangibles)
  • Profit before tax £825m (-19.7%)
  • Retail margin 3.48% (-69 bps)

(Results above are for the 52 weeks to 27 February 2021 for continuing operations, i.e. excluding Thailand, Malaysia and Poland)

Simpler range to enable focus on value

Through the pandemic Tesco greatly improved its position on value with a firmer focus on every day low prices, improvements to Aldi Price Match and much lower levels of promotional participation. This allowed it to make market share gains against all of its major competitors and build an expectation of excellent value for money for shoppers on every shopping trip, greatly reducing the attractiveness of competitors. The expansion of Aldi Price Match to over 500 products and a 32% increase in space allocation to these lines in stores has been pivotal in anchoring Tesco's value credentials, allowing the retailer to focus communications on other reasons to actively choose to shop at Tesco. By the end of the year value perceptions had reached to reach its highest level in a decade.

Going forward Tesco is keen to build on this progress and will step up activities to reduce costs from the business and also trim its range further to channel demand into the most popular products. Aldi Price Match will continue to be key to the strategy though Tesco could make changes to scheme depending on actions of Aldi and of competitors, such as Sainsbury's, that also benchmark the discounter.

Driving loyalty through Clubcard

Tesco has been hugely encouraged by the response to Clubcard Prices which has helped drive Clubcard penetration. 79% of sales in large stores now use Clubcard and the number of digital app users has doubled since the scheme's rollout in September to reach 5.2m. Following the addition of general merchandise to the scheme, Clubcard Prices now apply to 3,000 lines and the mechanic will soon be extended to F+F clothing and home ranges. While Tesco hasn't focused on expanding its Clubcard Plus subscription offer during the pandemic, this remains an option for the future. With limited marketing Clubcard Plus is already achieving uptake and basket uplifts ahead of Tescos modelling.

Adapting to permanently elevated levels of online demand

Enabled by a doubling of slot capacity, online achieved unprecedented growth through the pandemic, with 77% growth taking annual grocery home shopping sales to £6.3bn and online sales participation to 18% in the last quarter. Looking ahead, Tesco is keen to maximise the profitability of this less margin rich channel and key to this will be the opening or urban fulfilment centres.  A second UFC will open at Lakeside Extra next month and four further sites are set to open within the next 12 months, providing an efficient and scalable way to service much high levels of online demand. Another opportunity is to develop Click & Collect, which now accounts for 25% of Tesco's online sales, up from 11% in March 2020.

One area that has not developed much to date is quick commerce, with Tesco concerned that services are difficult to make profitable. However with many competitors actively developing services, Tesco continues to evaluate the opportunity. Two trials are in progress including a partnership between One Stop and Deliveroo.

Sustainability integrated into strategy

Sustainability is also set to become more integrated into commercial strategy, with new commitments building on progress to date. Tesco has now pledged to increase sales of healthy products to 65% by 2025 and it intends to lift sales of plant-based ranges by 300% by the same year.  Tesco has also set a long term goal of halving the environmental impact of the shopping basket and is working with WWF to achieve this. These goals sit alongside Tesco's continuing focus on its Net zero strategy, with commitments to lead the reduction in food waste and embed its 4Rs packaging strategy among other objectives.

Strength and agility through pandemic

Summarising performance, Tesco Group CEO  Ken Murphy said:Tesco has shown incredible strength and agility throughout the pandemic. By putting our customers and colleagues first we have built a stronger business. I’d like to say a huge thank you to the entire team for rising so selflessly to every challenge they've faced. Their efforts have been truly heroic.

While the pandemic is not yet over, we're well-placed to build on the momentum in our business. We have strengthened our brand, increased customer satisfaction and improved value perception. We have doubled the size of our online business and through Clubcard, we’re building a digital customer platform. Sustainability is now an integral part of our business strategy and we’re doubling down on our efforts to reach net zero.

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