Tesco’s extra pandemic costs are groundwork for the online future

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Tesco PLC (LON:TSCO) protests that it is not likely to churn out superlative profits in this past pandemic-boosted year for the supermarket industry, but it looks likely to benefit in the long-run.

The FTSE 100 company’s festive update trod a tightrope between boastfulness and piousness – proud of its strong performance but not wanting to show off too much profit as the public might be resentful.  

But while the group says extra profits this year are likely to be pretty much wiped out by extra costs from the effects of coronavirus – online grocery is one major area in which the effects of the pandemic have given Tesco and its big four supermarket peers the push and the cash they needed to pile investment into this area.

Over the Christmas period, the UK’s largest supermarket group said it delivered more than 400mln items via 7mln online orders.

Online sales growth was up 80% on the previous year to almost £1bn over the past 19 weeks.

As more and more people get used to ordering shopping online and the number of delivery slots increases as Tesco, Sainsbury’s, Morrisons and Asda all invest more in this area, it will become ever more commonplace for ever more people .

The weekly trip to the supermarket will certainly become a thing of the past many households.

One indication of the ‘stickiness’ of this trend for Tesco is that it now has more than 680,000 customers actually subscribing for regular deliveries via its Delivery Saver service.

“The trend towards online purchases by consumers is one which is likely to be maintained post-pandemic, and Tesco has shown that it is ready for the onslaught,” said Richard Hunter, market analyst at broker Interactive Investor.

Ross Hindle, analyst at research firm Third Bridge, agrees, saying Tesco appears “well-positioned to benefit from the growth in online food retail”.

“Online penetration levels could mature to around 14-16% in 2021 and as the market leader in this segment, Tesco is set to capitalise on this shift.”

The Welwyn Garden City-headquartered group said last summer than it is aiming to open around 25 dedicated urban fulfilment centres (UFCs) over the next three years, as well as the store-pick online grocery fulfilment hubs it operates from many of its large stores

Construction of its first UFC in West Bromwich was completed in June with the first delivery in August.

Previous boss Dave Lewis said back in June that the costs of its rapid online development and adapting stores for social distancing were “significant” and “and only partly offset” by business rates relief and increased sales volumes.

Although business rates have been paid back, it’s likely that part of the £810mln of extra Covid-19-related costs (which the company expects to cancel out most of its potential profit gains for the year) are covering this development, which should benefit the company in the long run.

With online delivery capacity having already more than doubled to well over 1.5mln slots per week in 2020, new boss Ken Murphy has taken on Lewis’s target to double this to 3mln delivery slots per week.

And yet Tesco’s shares, despite the £5bn dividend promised on the back of the sale of its last Asian business and a big pension top-up that will end this drag on cash flow, are lower than where they were before the pandemic. Those of smaller rival Morrison are in the same boat, with Sainsbury’s only slightly better.

Of all the UK grocery sector, Ocado PLC (LON:OCDO) has been priced by stock market as the big beneficiary, more than doubling last year.

But the market seems to be refusing to add this to the traditional grocers’ valuations – perhaps due to concerns about the seemingly ever-looming threat from Amazon.com Inc (NASDAQ:AMZN) using its Morrisons partnership as a stepping stone to fully gatecrash the market.

  –The author is a shareholder in Tesco–

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