Tesco shoppers switch to cheaper goods as they suffer surge in cost of living

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Shoppers are starting to switch to cheaper products as they feel the impact of rising living costs, according to supermarket chain Tesco.

The grocer said UK sales dropped 1.5 per cent in the first quarter compared with last year, part of which was spent in a lockdown that boosted spending on food.

Chief executive Ken Murphy cautioned that comparisons with last year were distorted by the continuing normalisation of shopper behaviour after the pandemic and the timing of Easter.

“It is really early days . . . we will have to watch what happens over the summer,” he said, adding that Tesco price inflation remained “a little bit below” the 7 per cent reported by industry analysts and that the level of switching between products was about 1 per cent of overall sales.

But he added that shoppers were “trading down in areas where there is cost pressure”, highlighting staples like bread and pasta. Earlier this year, Tesco said profit growth would be limited by the need to keep prices competitive in the face of squeezed incomes.

He declined to comment on a prediction this week from the Institute of Grocery Distribution that food price inflation could hit 15 per cent towards the end of the year.

However, UK sales were 8.1 per cent above the same quarter in 2019-20, the last comparative period unaffected by coronavirus.

The Tesco boss also defended the group’s stance on fuel pricing after the government accused forecourts of profiteering at a time when household budgets are under acute pressure from rising living costs.

“We passed on the cut literally on the same day,” said Murphy, referring to the government reduction in fuel duty by 5p per litre in March. He added group policy on fuel “had not changed in many years”.

Ministers have suggested not all forecourts have passed on the reduction and instructed the regulator, the Competition and Markets Authority, to investigate pricing in the sector.

The supermarket chain is the UK’s biggest supplier of retail fuel, with a market share of almost 16 per cent, according to Experian Catalist.

Petrol and diesel prices have surged following Russia’s invasion of Ukraine. The average price of petrol hit 182p a litre this week compared with 130p this time last year, compounding a squeeze on household budgets caused by rising food and power prices and increased taxes.

Murphy said Tesco “continues to price fuel very competitively” and rejected accusations of profiteering. “We see ourselves in the middle of the pack as far as supermarket pricing goes and therefore cheaper than most of the independents,” he said.

“I think we demonstrated clearly throughout the pandemic that we are on the side of the consumer . . . it’s a very emotive topic but our price position [on fuel] has not changed and won’t be changing.”

Supermarkets in the past used pricing and promotions on fuel as a way of attracting customers into shops.

It is also a useful generator of working capital because sales are made quickly for cash, but suppliers are paid several weeks in arrears, in effect providing the retailer with free short-term financing. Independent forecourts tend to have less generous payment terms.

Industry figures say there has been a cut this year in promotional pricing and coupons linking store spending to fuel prices, suggesting retailers are now treating fuel as a driver of profits in its own right.

But Murphy said increases in petrol and diesel prices were being driven “entirely by the cost pressures coming through” in the supply chain and he could see “no relief in the short term”.

He added that fuel volumes fell sharply during the pandemic and had still not fully recovered, but the increase in prices meant that fuel revenues were now “around the same” as before.

Tesco shares were little changed at 249.8p by late morning on Friday.

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