Tesco warns of cost inflation as it raises pay for third time in 13 months | Tesco

Tesco has warned annual profits will be at the lower end of its hopes as it faces significant cost inflation, revealing it is raising pay for a third time in 13 months.

The UK’s biggest retailer said it was aiming to make £500m of savings this year to offset its higher costs, including more automated tills and reducing the number of suppliers, as it said shoppers would buy fewer smaller gifts this Christmas.

One significant cost increase will be on pay. From 13 November, the basic hourly rate of pay in Tesco stores will increase by 20p to £10.30 (or £10.98 in London), making a total 8% increase in pay this year. Those in the group’s Booker wholesale business will receive a 25p-an-hour rise to a minimum of £10.

The latest increase puts Tesco workers on a par with John Lewis and just ahead of Sainsbury’s but behind Aldi and Lidl as retailers battle to attract thousands of temporary staff for the peak Christmas season.

Tesco also said it was freezing prices on more than 1,000 products until next year.

Ken Murphy, its chief executive, said: “We know our customers are facing a tough time and watching every penny to make ends meet.

“As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market. Despite these uncertainties, our priorities are clear. We have the right long-term strategy and we will continue to balance the needs of all of our stakeholders.”

He said it was “hard to tell” if the government had done enough to help households with their winter bills or if inflation on food had peaked, as high energy costs continued to affect a wide range of goods.

Murphy called on the government to cut the burden of business rates, a tax based on property, by a fifth and to make up the difference by increasing an online sales tax. He said the impact on Tesco would be fairly neutral but it would help shops in deprived areas where retail was often the biggest employer.

The announcements on pay and prices came as Tesco revealed a near-64% fall in pre-tax profits for the six months to 27 August to £413m. Sales rose 6.7% to £32.5bn.

The company now expects to make between £2.4bn and £2.5bn in underlying retail profits, a shift down from the £2.4bn to £2.6bn it previously expected.

Sales at established supermarkets in the UK increased only 0.7%, suggesting a significant drop in the amount of goods sold as price inflation across the grocery market was more than 5% during the period.

However, Murphy said Tesco had pulled off a “really strong performance” as shoppers had returned to more normal behaviour when offices, restaurants and cafes reopened after last year’s pandemic lockdowns. “We are on track despite a tough environment.”

Murphy said shoppers had been increasingly changing their behaviour over the summer as they reacted to the loosening of pandemic restrictions and the soaring the cost of living.

Households are buying more frozen goods in an effort to cut waste, cutting back on buying clothing and other non-food items and switching away from brands towards Tesco’s own-label goods.

Tesco said there had been a 13% increase in sales of its Finest premium own-label range as shoppers switched from eating out to dining at home.

Murphy said he expected families to buy fewer smaller gifts this Christmas and to be tightly managing their budgets by eating at home rather than going out for meals as they tried to “celebrate in an affordable way”.

Despite evidence that shoppers are reining in spending on home deliveries, with Tesco’s online sales down 11.3%, the group said it planned to almost double the size of its fast-track delivery service, Whoosh, from more than 400 to 800 by the end of the year.