Tesco's Fresh Food Helps Retailer Surmount Cost Pressures

(Bloomberg) -- Tesco Plc’s fresh food and prepared dishes helped the U.K.’s biggest retailer overcome a Brexit-fueled surge in costs, as the outlook brightens for the country’s grocers.

The supermarket operator’s profit jumped in the latest financial year as it sold more ready meals from ranges like Hearty Food Co. and plant-based products from the new Wicked Kitchen line. That helped Tesco mitigate inflationary pressure stemming from the weak pound, which has prompted staff cuts and price increases by Britain’s grocers as they compete with German discounters Lidl and Aldi for market share.

The shares rose as much as 5.6 percent early Wednesday.

“In Tesco’s U.K. grocery business, it’s a job very well done,” Bryan Roberts, an analyst at TCC Global, said by phone. “With Aldi and Lidl still growing strongly, it’s an impressive recovery.”

Tesco's Fresh Food Helps Retailer Surmount Cost Pressures

The stable performance of the core domestic food business bolsters Tesco as it integrates the U.K.’s largest food wholesaler, Booker, which it acquired in March. After a year in which Britain’s grocers battled against a surge in costs for imported food, the economic backdrop is improving, with wage growth accelerating as inflation falls and unemployment nears a record low.

Tesco’s share of the U.K. food market increased last year after a revamp of more than 10,000 of its own-brand products, focusing on ready meals and Italian food. The grocer has also begun selling Booker’s catering products in some of its larger stores.

‘Pretty Robust’

“Consumption patterns in food have been pretty robust and haven’t been affected by the interest-rate rise and the inflation we’ve seen,” Chief Executive Officer Dave Lewis said on a call with reporters. “We anticipate that will continue.”

Food inflation slowed to 0.8 percent in the last four weeks and will likely continue at a lower level, Lewis said.

After initially holding the line on prices, Tesco raised them at a faster rate than its competitors in the second half of the year ended Feb. 24, according to UBS research. That helped operating profit margins jump 64 basis points to 3 percent in the second half. A similar step up next year would see Tesco reach its target of an operating margin between 3.5 percent and 4 percent one year early.

Since taking the helm in 2014, Lewis has cut tens of thousands of jobs as part of a plan to reduce costs by 1.5 billion pounds ($2.1 billion). The most recent round of dismissals was in January, when Tesco scrapped 1,700 management positions.

Adjusted operating profit jumped 28 percent to 1.64 billion pounds in the latest year. The company’s shares rose to 222 pence, their highest since July 2015.

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