Tesco outlines ‘early signs’ of changing customer behaviour due to inflation

Tesco has reported “early signs” of customers trading down in areas where grocers have seen “significant cost price pressure” from inflation, such as core staples like bread, pasta and beans.

However, speaking to press today (17 June) as the retailer gave a trading update for the first quarter of its financial year, CEO Ken Murphy stressed these do not yet represent “dramatic shifts”. So far, Tesco customers are altering less than 1% of their overall spending.

It is also “tricky” to separate inflation behaviour from “normalisation” in consumer behaviour post-pandemic, said Murphy, as the year laps the Covid lockdown in place during the first quarter of 2021.

“It is quite early days and we have been careful not to over-analyse at this stage,” he stated, adding that an earlier Easter this year, the Jubilee and worse overall weather have also had distorting effects on behaviour.

Nevertheless, Tesco is seeing customers trading down to entry level or the core brand level product on staples such as pasta, bread and beans.

“The good news from our perspective is that we have fantastic value across all of those propositions, and so we’ve been keeping the customer trip and the customer mission as they’ve traded into our Tesco own brand,” Murphy noted.

Compared to this time last year, Tesco is also seeing higher frequency shopping trips and an elevation in the total number of trips, as well as basket sizes coming down.

 Our customers continue to rate us much more highly, which means that there’s a sustained improvement in our overall brand health.

Ken Murphy, Tesco

The retailer’s convenience business, including its Tesco Express stores, has also grown, with sales up 6.2% on a one year basis and 2.1% compared to three years ago, before the pandemic hit. At the same time, sales in large stores have decreased 0.7% over the year and online sales were down 14.5%, although both channels have grown on a three year basis (3.9% and 55%, respectively).

As Tesco navigates the challenges of inflation, Murphy said the grocer remains “resolutely committed to value”, adding that staying competitive on price “is the most important thing we can do for our customers at this time”.

“It is therefore even more important that we work with our supplier partners to mitigate as much inflation as possible. Where it has been passed on, our aim is to ensure it is a little bit less and a little bit later than the rest of the market,” he explained.

Murphy claimed Tesco is “lagging a little bit” behind the most recent grocery price inflation figures released by Kantar, which showed inflation had reached 7% over the four weeks to 22 May, the highest level since May 2009.

Tesco will continue to invest in its Aldi Price Match line, which includes more than 600 products, as well as its Low Everyday Prices and Clubcard Prices propositions.

“This powerful combination ensures customers get reliable value when they shop at Tesco no matter how much they buy,” Murphy said.

Market share and brand perception

Overall Tesco reported a 2% year on year growth in group retail sales to £13.6bn, up 9.9% on a three-year, pre-Covid basis. For the UK and Ireland sales were up 1.5% over the year and 9.7% over three years to £12.6bn. For the UK specifically, sales were down 1.5% year on year, but up 8.1% over three years.

The retailer said year on year performance has been impacted by the annualisation of last year’s lockdown, most notably in general merchandise, clothing and online, with price rises partially offsetting the effect.

However, Tesco has also reported market share growth of 37 basis points across all its markets, even as Kantar research shows discounters Aldi and Lidl are winning back share after losing it during the pandemic due to their lack of online trade.

Tesco’s increase in share has been taken largely from the other supermarkets in the ‘big four’ group, Murphy said, which includes Sainsbury’s, Morrisons and Asda. Tesco CEO: Marketing is ‘more important than ever’ amid cost of living crisis

Tesco also claims to have maintained the largest improvement in quality and value perception of any food retailer in the market compared to pre-pandemic. Tracked through YouGov, Murphy said Tesco had experienced “huge surges” in value, quality and overall brand perception.

“People were thrilled with how well we responded to the pandemic – the efforts we made to look after particularly vulnerable customers who couldn’t leave their homes. The amazing job our supply chain did staying in stock, managing all of the challenges that were apparent during the pandemic. And, of course the huge effort we made in communities, donating over 50 million meals last year,” Murphy told Marketing Week.

“So there’s a really good momentum in the business from a brand perspective.”

Murphy added that some of those numbers are beginning to “normalise” as the pandemic restrictions have lifted.

“But what we’re really pleased about is that if you read through all of the turbulence of the pandemic and look at what life was like before the pandemic and where we are now, our customers continue to rate us much more highly, which means that there’s a sustained improvement in our overall brand health,” he noted.