UK’s largest grocer Tesco to increase spending as profits soar

Largest supermarket operator in Britain reports surge in operating profits for first six months as fightback against budget chains starts to bear fruit.

A Tesco supermarket in London. tesco is the UK's biggest retailer. Alastair Grant / AP

Britain’s biggest retailer Tesco said it would increase investment in its stores and distribution network to boost profitability over the next three years, after reporting first-half results at the top end of expectations.

“Today, we are sharing our ambition to deliver a group operating margin of between 3.5 per cent and 4 percent by our 2019/20 financial year,” it said on Wednesday, up from 2.18 per cent in the first half of the year.

The Tesco chief executive Dave Lewis is spearheading a recovery after the growth of German discounters Aldi and Lidl and an accounting scandal hammered the group’s profitability.

Tesco said it would cut its operating costs by £1.5 billion (Dh6.99bn) by improving its distribution network and simplifying its store operations.

Capital expenditure to support the changes will be £1.4bn a year on average, it said, up from the £1bn it spent last year.

Tesco reported a 60 per cent rise in operating profit before one off items of £596 million for the six months to August 27, at the top end of analysts’ forecasts.

It said it was on track to deliver profit of £1.2bn for the full year, broadly in line with market expectations, after the recovery in its sales at British strengthened in the second quarter,

Tesco said however its pension deficit had ballooned to £5.9bn, up from £2.6bn in February due to the collapse in bond yields.

Tesco sees no let up in deflation in the UK grocery market any time soon, it said on Wednesday.

“As we look at the market and as we predict forward we still see some deflation in the market place,” Mr Lewis said.

“That’s a reality we faced into the last two years and we think we will continue to face into, certainly into the short term,” he said, adding that the market remained “very challenging”.

Separately on Wednesday, a survey published by the British Retail Consortium reported a record drop in the cost of food and found little sign of price rises on the back of sterling’s sharp fall since June’s Brexit vote.

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