How UK supermarket Tesco’s fortunes see-sawed during Covid-19 crisis

Pre-tax profits surged on food sales but costs of the pandemic sparked slump

A man wearing a face mask pushes a shopping cart at a Tesco supermarket in Hatfield, Britain October 6, 2020. REUTERS/Peter Cziborra
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British supermarket chain Tesco saw its first-half profits rise by more than a quarter as customers stocked up on essentials during the pandemic and online orders doubled.

However, a jump in food sales was outweighed by crisis costs and losses at the company's bank causing its operating profit to plummet.

The UK’s biggest supermarket by sales reported pre-tax profit for the 26 weeks to August 29 of £551 million ($712.29m), a rise of 8.7 per cent on the same period in 2019, as the crisis triggered major changes in how the nation shops for groceries. The company’s operating profit figures told a different story though, falling 15.6 per cent to £1.037 billion, with Tesco Bank one of the factors dragging down the balance sheet with a loss of £155m.

"The first half of this year has tested our business in ways we had never imagined, and our colleagues have risen brilliantly to every challenge, acting in the best interests of our customers and local communities throughout,” said Ken Murphy, Tesco’s new chief executive.

Like many of its competitors, Tesco was forced to overhaul its strategy to ensure customers could access food at the height of the pandemic in March and April when many British residents were confined to their homes in a nationwide lockdown.

The company more than doubled its delivery capacity to 1.5 million slots a week during the first half of the year. While food sales rose by 9.2 per cent during the period, clothing fared less well, with sales down 17.2 per cent.

The supermarket also spent £533m on upgrading safety measures at its stores and warned of mounting losses at its bank as the country’s faltering economy takes its toll on consumers’ finances.

Tesco said the crisis has had a “material impact” on the performance of the bank because it issued fewer loans and credit cards, and set aside more money for bad debts. This resulted in an operating loss of £155m compared with a profit of £87m last year.

“A marked deterioration in macroeconomic indicators, particularly UK unemployment and gross domestic product, drove an increase in the provision for potential bad debts,” Tesco said.

This is Tesco’s first set of results under its new chief executive Ken Murphy, who joined the company a week ago.

Tesco CEO Ken Murphy poses for a portrait outside a Tesco store in Britain, September 30, 2020. Picture taken September 30, 2020.  Ben Stevens/Parsons Media/Handout via REUTERS. ATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY.
Tesco chief executive Ken Murphy joined the supermarket chain last week. Reuters

Mr Murphy said there are “no plans for further retrenchment” of Tesco's overseas interests after the company expects to complete the sale of its Thailand and Malaysia businesses this year and the sale of its Polish business next year. Tesco does not operate any stores in the Middle East.

"Right now I'm just really focused on getting to know these businesses, getting to meet the team in central and eastern Europe when I'm allowed to travel and really understanding the drivers of that business," he said.

Investors responded positively to Tesco's half-year results, with the stock up 2.24 per cent at 9.53am London time on Wednesday.