Tesco Sets a Supermarket Precedent. Others Should Follow Suit.

(Bloomberg Opinion) -- Tesco Plc is to repay the 585 million pounds ($781 million) of business rates relief it received from the U.K. government during the pandemic. While Britain’s biggest supermarket has every right to keep the windfall that was granted in March, foregoing it is a wise move.

U.K. grocers did a sterling job keeping shelves stocked at the height of the Covid crisis. By working with manufacturers to ditch niche items and dedicating more space to the most in-demand products, their gaps in supply were short lived — a stark contrast to their U.S. counterparts, which still have not seen grocery stocks go back to normal.

But food retailers also faced increased expenses, from needing to hire extra staff to implementing new hygiene measures. Even though demand soared for online grocery shopping, there were added costs that came with having to pack and deliver food orders. Tesco said it would incur expenses of 725 million pounds this financial year from its pandemic response. 

While that’s a fraction of its about 45 billion pounds of annual sales from the U.K. and Ireland, the government support would still have helped. But accepting it would have come with a significant potential for backlash.

Next year, Tesco will pay out a 5 billion-pound exceptional dividend to shareholders, after bringing in 8.2 billion pounds from the sale of its businesses in Thailand and Malaysia. The optics of such a big distribution alongside tax relief would not have been good.

With just a couple of months to go before the close of its financial year at the end of February, Tesco now has enough visibility into its finances to make a decision. Profits will be lower without the tax break, but the company can shoulder this. How the repayment will be treated in accounting terms hasn’t yet been decided. But Tesco said that, excluding the return of the relief, its operating profit before exceptional items would still be at least the same as last year. The shares were down about 1.5 % as of Wednesday morning. 

The rewards, though, seem clear. The company will benefit in terms of general goodwill and less political risk, and its decision will force smaller competitors to fall into line. 

Indeed, the onus will now be on the other U.K. supermarkets — Asda Group, J Sainsbury Plc and Wm Morrison Supermarkets Plc round out the so-called Big Four — to avoid public criticism for accepting multi-million-pound handouts. Discount chains should pay attention too. B&M European Value Retail SA also benefited from the tax break, yet it announced a 250 million-pound special dividend last month. 

British supermarkets and value chains are also set to enjoy bumper trading over the next few weeks, as more people stay home this year and spend on turkey crowns and tinsel. It’s a good time to follow Tesco’s lead.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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