Tesco shares sink after forecasting staff pay rises would hit profits

Tesco said its full-year profits would be hit by staff pay increases, sending shares in the supermarket group to their lowest level in more than six years.

The basic rate for UK store staff will rise by 20p to £10.30 an hour with effect from November, the retailer said on Wednesday. It joined several rivals in awarding one-off pay rises outside the normal wage bargaining cycle in response to soaring inflation.

Chief executive Ken Murphy said the increase meant front-line pay had risen 8 per cent so far this year. “It’s a key part of how we see the world . . . We try to ensure that our colleagues don’t have to go to food banks,” he said.

Tesco trimmed its forecast for adjusted operating profit to £2.4bn-£2.5bn from an earlier forecast of £2.4bn-£2.6bn.

Shares fell 3.5 per cent to 202.60p, their lowest level since 2016.

Murphy said Tesco would maintain its “laser focus” on pricing for customers, especially the gap between its prices on key lines and those of discounters.

“Since I joined we have progressively closed the gap,” he said, adding that the differential was “a lot tighter” than the 15 per cent estimated by some analysts.

“Our plan is to be able to take away the worry that you are paying more in our shops for those essentials you can buy in a limited-range discounter but also to make sure you can get everything else you need,” he said.

Murphy said the company would continue to minimise cost inflation through tough talks with suppliers, following recent high-profile disputes with Heinz and pet food supplier Mars.

“Our policy in negotiations is to forensically and scientifically look at the true cost pressures [suppliers] are facing and the minimum possible increase they need to pass on to sustain their business,” he said.

Rising cost-of-living pressures meant Tesco was “seeing people trade down to own-label propositions and some trading from fresh into frozen”, said Murphy, though he added that “customers were still determined to have a great Christmas” even if budgets had to be reined in.

“We think there will be more dining in and more celebrations in the home,” he said. “But they are going to want to manage those budgets . . . we believe that the gifts this year may be smaller and to a tighter group within the family and friends unit.”

Murphy’s comments came as Tesco reported first-half retail operating profit was £1.24bn, down almost 10 per cent from last year. Total sales excluding fuel rose 3.1 per cent to £28.2bn.

Pre-tax profit fell 64 per cent to £413mn, largely because of a £626mn non-cash charge related to the impact of rising discount rates on the carried value of its store estate.

The company said it was accelerating its cost savings programme, with £500mn delivered in the current year and the cumulative £1bn of savings set to be achieved a year earlier than planned.

Bernstein analyst William Woods said sales in the second quarter were better than forecast but the outlook was cautious. “The key question is whether management are being conservative, or are margins going to be severely pressured?” he said.