5 months ago • 2 mins
What’s going on here?
UK grocery giant Tesco raised its profit forecast on Wednesday after an absolutely smashing start to the year, as the Brits would say.
What does this mean?
Tesco’s sales over the first half of the year were up nearly 8% from the same time last year, excluding the effects of opening and closing stores. Tesco maintains that’s a result of keeping prices as close as possible to discount rivals like Aldi, persuading budget-conscious shoppers to walk through the doors. Thing is, the retailer sold roughly the same amount of items as it did last year, meaning those sizable sales – and the resulting better-than-expected profit – were down to higher, not lower, overall prices. Either way, predicting that easing inflation will encourage shoppers to pile their carts extra high during the holidays, Tesco pulled up its profit forecasts for the rest of the year.
Why should I care?
Zooming in: Rock, meet hard place.
Inflation’s making small decisions – like where you shop – matter more than usual. And while discount retailers like Aldi and Lidl may seem like a clear choice, the difference could be smaller than you think. See, cheaper own-brand products have the thinnest profit margins, so when inflation sends costs upward, retailers have to hike their price tags to make sure they break even. That means while your premium grocery bill will have gone up, for sure, the percentage increase could well be less than that of a traditionally budget-friendly alternative.
For markets: We’re all just pawns.
Major supermarket chains have an advantage over many other types of retailers: their customers truly need what they’re selling. So they can pass higher costs onto their shoppers, who will duly trim from other areas of their budget to keep food on the table. And while retailers are quick to pull prices up, they’re not as fast to drop them when costs eventually cool down. For the likes of Tesco, Walmart, and Costco, that’s a recipe for premium profit margins.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.