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Tesco warns of lower profits as UK inflation squeeze tightens

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© Reuters. FILE PHOTO: Woman sits under a logo of Tesco supermarket in Budapest, Hungary February 29, 2016. REUTERS/Laszlo Balogh
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By James Davey

LONDON (Reuters) -Tesco, Britain’s biggest retailer, warned of a drop in profits this financial year as surging inflation piles pressure on the supermarket group and its customers alike.

Shares in the company, which has a share of more than 27% of Britain’s grocery market, fell 5% in early Wednesday trading, the biggest decline of a blue-chip stock in Europe

That dragged down other retail stocks, including online supermarket Ocado (LON:OCDO), Sainsbury’s, JD Sports and Marks & Spencer.

Tesco (LON:TSCO) reported retail adjusted operating profit of 2.65 billion pounds ($3.45 billion) for the year to the end of February, up 36% and in line with guidance. It sees profits of between 2.4 billion pounds and 2.6 billion pounds for 2022-23.

“Given the significant uncertainties in the external environment, we believe it is appropriate to provide profit guidance in the form of a wider than usual range,” Tesco said.

Britain’s inflation rate hit a 30-year high of 7% in March, even before April’s sharp increase in utility bills. Surging prices are causing the biggest squeeze on household incomes since at least the 1950s.

Tesco said three factors were likely to influence its performance – the return to more normal customer behaviour after the COVID-19 pandemic, its ability to offset higher costs, and the investment required to maintain low prices.

“Clearly, the external environment has become more challenging in recent months,” said CEO Ken Murphy.

“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.”

A cost of living crisis and supply chain disruptions due to Russia’s invasion of Ukraine are weighing on the UK grocery sector.

Last week, Morrisons, Britain’s No. 4 supermarket group, warned its annual profit could be hit by the conflict and rising inflation. No. 7 player, the Co-operative Group, pointed to “stark” economic headwinds.

The war in Ukraine has hurt supplies of sunflower oil, and has driven-up animal feed and wheat prices, which has had a knock-on effect on meat, dairy and bakery.

Soaring energy prices, as well as increased labour costs, have also added to the cost of doing business.

Market data suggests shoppers have started to shift their buying habits to save money, opting for more cheaper own-label food products.

Tesco said group sales rose 3.0% to 54.8 billion pounds in 2021-22. It outperformed its three biggest rivals – Sainsbury’s, Asda and Morrisons.

The group has to date returned 300 million pounds to shareholders through a share buyback programme and has committed to a further 750 million pounds by April 2023.

($1 = 0.7681 pounds)

Tesco warns of lower profits as UK inflation squeeze tightens

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