Tesco PLC (TSCO) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us for our quarter 1 results call. I'm here in Welwyn as usual with Imran. And in a moment, we'll open up the lines for your questions. I want to start by saying a huge thank you to the entire Tesco team for their great work and dedication. Their commitment means that we can continue to deliver great value and service to our customers every day. We've had a strong first quarter, delivering volume growth across the U.K., the Republic of Ireland and Central Europe. Inflation has continued to ease since we reported our full year results in April, and we've remained focused on delivering the best possible value for our customers. Aldi Price Match is now across 700 lines. Combined with Low Everyday Prices and Clubcard Prices, it enables us to be the cheapest full-line grocer, a position we've now held for the last 19 months. Our focus, however, is not only on value, and we've continued to invest in product quality and innovation. Scotland's game against Germany this evening kicks off a great couple of months of sport. We have just relaunched our Finest Dine in for two offer with our new summer menu focusing on pub classics done brilliantly. And we have improved our Picnic & Deli and Fire Pit ranges ahead of all those summer parties. Our focus on innovation and quality throughout our offer is supporting switching gains from the premium retailers, which we've now seen consistently for almost 2 years. Sales of Tesco Finest continued to grow strongly, up by over 12% in the quarter. Another key driver of our performance is our focus on service and customer experience. We continue to have more colleagues on the shop floor, making sure our customers can always find what they're looking for. The queues are kept to a minimum and shelves are always replenished. And we've also improved availability by around 1.5 percentage points year-on-year in both packaged and fresh food. We're continuing to develop Clubcard, enhancing ways to personalize the experience. For example, we've recently begun trialing a new interactive initiative, which allows customers to take part in a series of challenges based on their shopping habits with a chance to earn up to GBP 50 of additional Clubcard points. Clubcard is growing and satisfaction scores are up, helping cement its position as the most popular grocery loyalty scheme in the country. Our progress is clearly demonstrated by our growth in market share with the latest Kantar read showing the highest gains for the last 2 years. This has been supported by 15 consecutive periods of switching gains with our customers shopping us more often and with more in their baskets. Our brand perception and customer satisfaction scores tell a similar story with growth across all measures ahead of our competitors. As you know, a core part of our strategy is to serve customers wherever, whenever and however they want to be served. That includes providing them with the greatest choice of products. And last week, we launched Tesco Marketplace. Marketplace is a new online platform which gives our customers the opportunity to shop a broader range of thousands of products alongside the groceries they know and love. It's early days, and we're focused on growing the offer and expanding the range to bring the widest selection and best products to our customers. Last week, we announced Booker's acquisition of the wine and spirit merchant Venus. Venus is a well-respected and fast-growing supplier of drinks to the on-trade, which significantly enhances the range of premium drinks we can offer Booker customers. Booker continues to perform strongly despite the ongoing decline in the tobacco market and the strength of prior year comparatives, with the core retail and catering businesses delivering underlying growth and outperforming the market. I'm really pleased with our progress in the first quarter. Our performance is strong, our in-store execution is best-in-class, and we're making meaningful strategic progress. With sales trend in line with our expectations and the business well positioned for the months ahead, I'm pleased to reiterate our guidance for the full year. Thank you all for listening, and I'll now hand back to the operator for questions. Thank you.

[Operator Instructions] The first question comes from James Anstead from Barclays.

Two questions, please. So firstly, on Booker, which had this like-for-like decline in the first quarter, you've given some very clear explanations about some of the moving parts behind that negative number. I just wonder, you perhaps got some better idea than us into some of those factors and how they move later in the year. Should we be cautious about that number staying negative for a number of quarters? Or are you optimistic that with less challenging comps, that might move back into positive territory? That's the first question. And second one, on Central Europe, I know it's not the biggest part of the business. But I think back in April, Imran was quite optimistic that Central European profitability would rebound quite nicely this year. It looks like the quarter started well. So has that given you some confidence about that profit recovery being delivered?

Thanks, James. I'll take the second question first. I think I'd start by saying that Central Europe is performing in line with our expectations in the first quarter, so pleased with that. And on Booker, I think that what you should be kind of banking on is that we'll continue to outperform the market in both retail and catering. And I think that our confidence in Booker is underpinned by our willingness to invest in acquisitions like Venus, which we think is a great addition to the Booker portfolio. Don't know, Imran, if you want...

Just a quick follow-up on Booker with Best Food because my understanding is Best Food, to some degree, has been rationalizing some of its customer base. Is that a factor that perhaps that's just an ongoing process and it doesn't come to a particular end point? Or is there a quarter where that headwind starts to drop out?

Just maybe also give you my views on Booker and then also on Best Food. I mean exactly I can say, look, I also feel very good about the overall Booker performance. For context, we lapped around 16% growth in retail and around 10% in catering. So what I thought, it's great to see that both divisions are outperforming the market and showing real growth. And then as we had talked already last year, we anticipate that Best Food Logistics, driven by pruning as well as a softer market, we will continue to see declines. And similarly on tobacco, I expect to see both of those to be negative territory for the rest of the year. And our reality also is, as we've said, James, both of those are relatively low margin and, therefore, is all within the guidance that we've given.

Our next question comes from Monique Pollard from Citi.

I just had a couple of questions, too, if I can. The first one, just quickly on -- back on Booker. I just wondered if you could help us understand, I don't know, rough size or profitability impact of both the tobacco and the Best Food Logistics within Booker to get a sense of whether that's any kind of material profit headwind? And then second, just sort of bigger-picture market update, whether you're still expecting low single-digit inflation for the full year, please?

Look, I mean, on your first question on Best Food Logistics and profitability, look, it's not a material piece of the profit. So it's less than a handful of millions. So that gives you a sense of the scale of that business. In terms of inflation and how we've seen it, look, when we entered the year, we said our central case for the plan for the year would be a low level of inflation, low single digit, right? And when you look at how the year started, it's panned out exactly like that, right? The Kantar read in the first -- we started the financial year was, what, 4.5%, and it's now around 2.5%. We've been below that. So it's exactly there where we thought it would be. Now as we look ahead, our central case continues to be low levels of inflation. Now clearly, underneath that, you'll have moving pieces on the commodity side, which we'll continue to monitor to make sure we're ready for whatever happens. But that certainly continues to be the base case for us.

Our next question comes from William Woods from Bernstein.

The first question is just building on that inflation question. Do you think that we'll start to see some inflection in food prices over the next kind of 6 to 12 weeks? I know you've talked about that before, particularly as minimum wages kind of feed through. And then the second one is, can you just give us an update on what you're seeing in terms of consumer spending habits, volumes, et cetera, and how the weather has been affecting trading over the last few weeks?

Thanks. So our base case assumption on kind of very low single-digit inflation remains in force. And I think that is taking into account all of the factors, including kind of national living wage impact; commodities volatility because we're seeing some commodities down, some commodities up; and weather; and I think also the increase in promotional funding. So they're all factors that are playing into inflation in the market, but we're talking 1%, 2% probably as the range. On the second question in terms of consumer spending, we're seeing it hold up very well, particularly in food. So we're seeing volume growth across all of our markets, and we're very encouraged by that. Let's see, as the summer progresses, clearly, weather plays its part, but we have a fantastic summer of sport lined up with the EUROs kicking off imminently and then the Olympics later on in the summer, which we think will be great occasions to celebrate. And we've got a fantastic trade plan and product lineup ready to go for the summer.

Yes. And maybe also just to add on weather impact, right, the fact that we are 7% sort of nonfood and 93% food is obviously not unhelpful when it comes to big ticket items that are impacted by weather as well.

Our next question comes from Izabel Dobreva from Morgan Stanley.

I had a couple of questions. Firstly, I was wondering if you could give us an update on the Irish business given that the market share trend and the like-for-like has been very resilient. Could you give us some color of what's happening on the ground and what your strategy is for that business? And then I have a second question [ on Marketplace ]. I appreciate that you've only just launched it, but could you maybe share what the initial customer response has been and how you're thinking about how big this can get maybe in terms of number of SKUs or what level of product category expansion you have in mind? And then my final question is a little bit more conceptual, it's to do with the personalization of promotions. I was wondering, are you seeing this as a competitive differentiator yet in terms of how you are attracting promo funding from suppliers? So do you think your ability to use that data to maximize the volume response to promo means that you're attracting greater promotions than your peers? Or do you think that the promo activity is so widespread and the data is too young to be able to make it a differentiator at this stage?

Well, Izabel, you have been up early this morning. Great questions. Thank you. So first one on the Irish business, yes, our Irish business is performing extremely well. It has been consistently winning share now for over a year, including against the discounters. So we're very, very pleased with the Irish business. And actually, it's underpinned by a very strong value proposition, a very strong product innovation pipeline benefiting from the group innovation platform and also benefiting from group technology in terms of the improvements to the Clubcard app. The introduction of Clubcard pricing, the introduction of the Aldi Price Match have all really helped accelerate Irish performance. What I would add on top of that, which I'm particularly pleased about, is the work that the Irish business has done on its store environment. It has been a real standout in terms of its innovation on the fresh first strategy, on its bakery innovation and the innovation now it's had in home and clothing. And so there's been a really meaningful improvement to the store environment in Ireland, which I think has been an inspiration for the rest of the group. And so very, very pleased with that performance, and I think we should expect it to continue. The second question around Marketplace is that we've spent a lot of time over the last 4 years or so becoming super-efficient, streamlining the business, rationalizing SKUs down to the range that really, really, we think, is essential for customers. Marketplace is really about then building out that proposition to broaden our appeal, broaden our range in all food and food-related missions. And I would stretch that into clothing and home to make sure that we were, to the greatest extent possible, a one-stop shop for our customers. And that really is the strategic thinking behind Marketplace. The difference between this Marketplace execution and the old Tesco Direct is it's fully integrated on to our core grocery home shopping platform, even if the delivery mechanism is obviously fulfilled by a third party and, therefore, comes on a different time cycle. So that's the kind of strategic rationale behind it. We have set internal ambitious targets. But really, our focus for the next 12 months will be around refining the proposition, growing the range, making the range more relevant and refining the customer experience, so it's seamless and slick, making sure the delivery experience and the product quality is everything you'd expect from Tesco. On the last question, personalization, we definitely see as a differentiator. It's a very important part of the retail landscape today in our view. I think that customers very willingly participate in schemes like Clubcard, but the quid pro quo is they expect you to use that data to solve problems for them, to make their lives easier, to filter out all the irrelevant stuff and serve them up the really relevant propositions and offers that help them in their daily lives. And I think we've got to fulfill our end of that bargain, and that's our ambition with personalization. And clearly, that also helps our suppliers to target the customers that actually want to hear about their products and their deals.

We will now take our next question from Clive Black from Shore Capital.

Although I should say, Ken, neither Ireland or Northern Ireland are at the EUROs, so it's only passing interest to me. On -- a few questions following up those of the others. The weather is not something that folks really want to talk about on calls, but are you factoring in more of the same for your Q2? Or could there be a risk on the upside should Mr. Sunshine actually turn up? Secondly, one of the interesting features of your statement was the performance of Finest. With inflation falling and living standards rising in the U.K., is mix actually something that we should be thinking about a little bit more than purely price and volume? And then just lastly, although very helpful, Imran, for the split between food and nonfood, is demand levels for nonfood or particularly discretionary goods surprisingly weak for you? Or is it something that's going to plan?

So I'll take the food, nonfood last and then we can work all the way back up. Look, actually, I was pleased with the performance on nonfood for the first quarter. So clothing, we had a nice growth and that was both volume-led growth, which is nice to see. And then general merchandise was actually flattish. And in growth, if I exclude the work we've been doing on pruning, so from that perspective, very happy on both home and clothing on that performance. On the Finest, look, clearly, driving profitable mix is important. Finest is a fantastic vehicle. As you say, for yet another quarter, we see double-digit growth in Finest. It's accretive when I look at own label, it sort of plays a nice role. And the fact that it is a volume-led growth in Finest is great to see and led, as you saw to the consecutive months of switching gains from premium retailers, which is great to see. Maybe, Ken, I'll pass to you on the weather.

Gee, thanks, Imran. Hang on, Clive, I'm just giving my crystal ball a bit of a polish here. Look, weather is a thing in food and nonfood retailing. Everybody is aware of that. I think our focus has been, can we consistently outperform the market. And that's been our focus. And so far, so good. And that's our plan for the rest of the summer.

In that respect though, Ken, I guess the question I'm just asking, are you more or less now anticipating more of the same? Or could there be a nice tailwind for you if there was actually a period of sustained good weather?

So look, our base planning assumption every year is for an average summer, and then we kind of adapt the plan depending on what happens in front of our faces. So look, clearly, the weather is less than ideal right now and is likely to stay this way for the next couple of weeks, but then could come good. If you remember last year, the opposite happened. So we had a very good May, June; and then July, August were very poor. So look, I wouldn't pre-judge the summer. It's early days. And obviously, we have a very strong sporting calendar, which always helps.

I hope you're not planning for England to be in the quarterfinals, but otherwise, enjoy the football.

Thank you, Clive.

Thank you.

We will now take our last question from Sreedhar Mahamkali from UBS.

I have 3 short ones, hopefully. Just going back on to the loyalty pricing, Ken, I suppose to the extent you can, could you discuss how your engagement has been with CMA on the subject? What are you saying to them to the extent you can share? And clearly, we hear from them in a few weeks, it seems like. That's the first one. The second, maybe just in terms of competitive intensity in the market through the quarter as inflation continues to fall swiftly. Clearly, quite a lot of your competitors are coming from behind you in terms of volume. Is there any change in the competitive intensity that you are noticing? That's the second one. Thirdly, to the extent again you can, what are the long-term ambitions on Marketplace? I know it's just started growing. How should we think about the medium term, what you are expecting to see there? What makes it a success?

Great. So look, we've been collaborating and cooperating very fully with the CMA on loyalty pricing. Nothing in our interactions with the CMA at this stage would unduly worry us. To be honest with you, I think it's been a very reasonable and open conversation. We feel very good about the fact that we operate an everyday low price mechanism on over 2,000 lines in our stores, which means consumers can access value without any membership of any scheme in all of our shops. And then clearly, on a very well-understood deal, Clubcard customers then access great deals on all those value-added kind of brand lines through the Clubcard Prices mechanism. So you may see some modifications to the rule, but other than that, we're not anticipating anything else. And then clearly -- and clearly, the election has an impact as well on timing, et cetera. The second thing, in terms of competitive intensity, this market is about as competitively intense as you can get in any market I've ever been in in my life. With 11 full national competitors in grocery all competing for baskets, it is a battle every day to win the customer's basket. And that, we don't see changing. There hasn't necessarily been a change in that competitive intensity. I think it's remained equally intensive is the way I would describe it.

Yes, I think that's right. I mean just to build on that, the good thing is we measure our price indices versus our competitors rigorously every week. And the good thing, as we've inflated less than the market versus at least what Kantar measures, we have continued to protect and slightly expand on the price indexes that we have, which is a good thing, and that gives you a sense. But I think the main point is Ken's, which is this continues to be a very competitive and intense market.

On the third question, in terms of the longer-term ambitions of Marketplace, I think I laid it out in the previous answer, which is that we see it as a way of complementing our kind of highly streamlined, highly efficient in-store ranging. This is a chance in a very capital-light way for us to build out the range of our products we can offer customers for those more specialized differentiated products in a way that doesn't compromise our operating efficiency. So we're feeling that that's an important addition to our proposition. And kind of over time, and everything that's food or food-related, we're looking to make Tesco a one-stop shop for customers. Clearly, they attract Clubcard points and all of those. And our ambition is to make that customer experience as streamlined and as frictionless and as convenient as possible and as inspiring as possible. And clearly, the more work we do on personalization and attribution, the more we can make sure that the products that customers are getting displayed on their personal home pages or whatever are the most relevant to them. And really, we haven't set any limits on the growth related to this. We're just really focused on making it the best possible experience.

With this, I'd like to hand the call back over to Ken Murphy for closing remarks. Over to you, sir.

Thanks very much. Thank you all for your questions. I think just to recap, this has been a good start to the year for the company. We're particularly pleased with the level of outperformance versus the market in our core Irish and U.K. markets. Our ambition is to maintain that momentum as we go into the summer. And we look forward to seeing you all again in October. Thank you.

This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.