Shares in Tesco PLC (LSE:TSCO) fell 5% to 430.42p on Thursday, as another robust trading update ran into a familiar problem for the UK’s biggest supermarket: expectations that have risen almost as fast as its market share.
The figures were largely positive, but investors focused on what was, by Tesco’s own lofty standards, a relatively modest period of growth and a weaker contribution from Booker, its wholesale arm.
The group also stuck to its cautious tone on guidance, which has frustrated the market before, although it did say adjusted operating profit for the year should come in at the upper end of its £2.9 billion to £3.1 billion target range.
Like-for-like sales rose 3.1% in the quarter and 2.4% over the Christmas period, respectable numbers in a fiercely competitive grocery market. Growth was driven by several standout areas.
Sales of the premium Finest range climbed 13%, online sales rose 11% and Whoosh, Tesco’s rapid delivery service, surged 47%, adding about 250,000 new customers over the period.
That progress, however, comes against a tougher backdrop. Competition remains intense and costs are rising following recent Budget measures affecting the minimum wage, National Insurance contributions and business rates. Maintaining lower prices to protect market share also inevitably puts pressure on revenues, even as volumes rise.
Scale continues to work in Tesco’s favour. Initiatives such as Aldi Price Match, Everyday Low Prices and Clubcard Prices allow it to lean harder on pricing than smaller rivals, while ongoing cost-cutting helps to fund those reductions, reinforcing its advantage.
Away from Thursday’s initial setback, the shares have closely tracked Tesco’s steady advance. Over the past year they are up 22%, broadly in line with the FTSE 100, and they have risen 87% over three years, a notable achievement in a notoriously competitive sector. Some in the market may see the opening dip less as a warning sign and more as an opportunity created by expectations that have, for now at least, run ahead of delivery.