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Tesco sees online sales skyrocket, but profits down through costs and competition

Tesco has strong year

Tesco has seen online sales rocket up by a further 77% across 2020/21, accounting for £6.3bn of the group’s total £53.4bn in sales excluding fuel. However, overall profits were down 28% to £1815m.

Online sales added an additional £2.8bn, with online sales participation doubling to 15% for the full year, reaching a peak of 18% in the fourth quarter. Home deliveries accounted for 79% of online orders, with click & collect participation increasing from 11% at the start of the year to 25% by the end of the year.

The company also opened its first UFC (Urban Fulfilment Centre) in the year in West Bromwich Extra. Its second UFC in Lakeside Extra is now due to open next month having been delayed several months by the pandemic and a further four sites are due to open within the next twelve months. These UFCs will enable the retailer to provide access to more delivery slots for customers with an increased rate of picking – a scalable, efficient option to fulfil ongoing online demand.

Overall, however, the COVID-19 pandemic had far-reaching impacts on operations, says the company, incurring significant costs in safeguarding customers and colleagues, primarily through higher payroll costs. All colleagues who were off-work due to COVID-19 and those who were required to shield or self-isolate received full-pay from their first day of absence.

The company also says that it incurred costs for safety consumables, protective equipment and additional distribution, as well as the temporary closure of hospitality outlets impacted our retail partners who operate from our stores, leading to a reduction in rental income.

In total, UK COVID-19 costs led to a £892m reduction in operating profit, which was partially offset by the contribution from higher sales. In the current year, whilst Tesco anticipates that the majority of these costs will fall away, a certain proportion are likely to be required due to any ongoing. The retailer’s current estimate – based on the latest UK Government roadmap for easing restrictions – is for around a quarter of the 2020/21 costs to be repeated.

Looking ahead, Ken Murphy, CEO, says: “We will continue to be guided by our four key priorities in response to the COVID-19 crisis: providing food for all, safety for everyone, supporting our colleagues and supporting our communities. We also remain committed to delivering great value to help customers in challenging times.”

He adds: “Whilst we expect some of the additional sales volumes we have gained this year in our core UK market to fall away as COVID-19 restrictions ease, we expect a strong recovery in profitability and retail free cash flow as the majority of the additional costs incurred as a result of the pandemic in the 2020/21 financial year will not be repeated.”

He concludes: “ Whilst the greater than usual level of uncertainty around sales volumes, mix and channel shift makes it difficult to be precise, our best estimate at this stage is for retail operating profit to recover to a similar level as in the 2019/20 financial year (on a continuing operations basis) – the year prior to COVID-19 having any impact on performance.”

Fraser Thorne, CEO and founder of Edison Group, comments: “Tesco’s performance over the pandemic has translated into a strong set of preliminary results for 2020/21. Sales have grown by 7.1% up to £53.4bn however profits have taken a slight hit down 14.7% to £1990m. The drop in profits can largely be attributed to the extra rise in trading costs as the pandemic hit with limits to supermarkets capacity and supply chain issues at the start of the pandemic, both playing a part in this drop in profits.”

He continues: “Overall, these are a solid set of financial results as Tesco grew its UK market share in the year. Its launch and extension of its Aldi price match to over 500 lines in March 2020 is a key factor to this growth, fighting back against the low-cost supermarkets that have seen such success over the past few years. With the pandemic having shifted many customers to online shopping, Tesco saw its capacity double to over 1.5m slots per week. This, coupled with its target of 25 new urban fulfilment centres to cater for this growth, means its online business is in great shape for the year ahead.”

He concludes: “As the country emerges from lockdown, Tesco and other supermarket retailers are in a solid position. Seeing how they weathered the initial storm, the easing of restrictions is only likely to benefit them further. Overall, word from the company is positive, and profitability is expected to grow as trading conditions remain volatile for the foreseeable future.”

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