Tesco's 'game changing' price strategy is working

Tesco returned to positive sales growth in the first half of 2016, with UK sales rising 0.6% in the first six months of the year compared to the same period in 2015.

The supermarket published its first-half results on Wednesday.

Here are the key points:

  • Like-for-like UK sales up 0.6%;
  • Group sales up 1% to £24.4 billion;
  • UK volumes up 2.1% and international volumes up 3.3%;
  • Group operating profit up 34.4% to £515 million;
  • Statutory pre-tax profit down 28.3% to £71 million.

CEO Dave Lewis says the figures show “further strong progress” for Tesco’s turnaround plan, following a disastrous accounting scandal two years ago and a bruising price war in the supermarket sector.

Lewis says in the results statement: “We have made further strong progress in the first half, with positive like-for-like sales growth across all parts of the Group as we re-invest in our customer offer whilst rebuilding profitability in a sustainable way.

“Whilst the market is uncertain, we have made significant progress against the priorities we set out two years ago, stabilising the business and positioning us well for the future.”

Lewis was parachuted in to run Tesco in July 2014, shortly after a £263 million blackhole was discovered on its balance sheet. The UK’s Serious Fraud Office recently charged 3 former Tesco executives over the matter.

As if that wasn’t enough, the accounting scandal coincided with the rise in popularity of German discount supermarkets Aldi and Lidl in the UK. Their rise sparked a bruising supermarket price war that has been great for consumers by tough on retailer’s bottom lines. Tesco says in Wednesday’s update that its average prices are now more than 6% lower than they were 2 years ago and sales shrunk by 0.7% last year in the UK.

Lewis’ turnaround plan for the supermarket includes lower prices that are sustainable, rather than relying on multibuy promotions.

Tesco launched a “Price Promise” scheme last October that automatically took money off at the till if a customer could have got an item cheaper elsewhere. Retail analyst Nick Bubb called it a “game-changer” at the time.

The supermarket is also slashing costs, selling off businesses like coffee shop Harris + Hoole and restaurant Giraffe. Tesco booked £73 million in restructuring and redundancy costs in the first half and plans to cut a further £1.5 billion in costs.

Tesco is promising an operating margin of 3.5-4% by 2019/20, which will be achieved in part through the radical restructuring and cost cutting.

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