Why is the biggest grocery store in the UK unlikely to benefit from the booming S-FOX 40 WICZ TV | Instant News

By Hanna Ziady, CNN Business

Food and supplies flew from supermarket shelves in the UK, but that did not mean their profits increased rapidly.

Tesco, the largest grocery store chain in the UK, said Wednesday that the additional costs were related to “feed the nation“It could amount to up to £ 925 million ($ 1.1 billion) this year if restrictions on employment and social measures keep the distance from fighting coronavirus pandemic Last 20 weeks.

Even in the company’s best-case scenario, where lockouts last for 12 weeks, costs are expected to rise by £ 650 million ($ 804 million), driven by an increase in payroll, distribution and cleaning and maintenance costs, said CEO Dave Lewis.

The property tax cut offered by the government will only offset part of these costs, freeing £ 585 million ($ 724 million).

Even a wave of panic purchases in the last few weeks won’t significantly increase profits at Tesco, which, like many other similar companies, should ration supplies to store shelves.

Wholesale sales in the UK jumped 20% last month to a record £ 10.8 billion ($ 13.3 billion), according to data provider Kantar. Tesco sales jumped 30% during the first three weeks of March, as the company sold 76% more toilet paper, 101% more pasta and 363% more hand washing, according to an investor presentation published Wednesday.

Since then sales have stabilized and are at a more “normal” level, with an increase in the number of people eating at home rather than in restaurants, Lewis said.

But the nature of the coronavirus pandemic means that even grocery retailers, which are some of the few businesses that are still physically open in many parts of the world, have to change their operations at considerable expense.

Why costs have gone up

Tesco estimates its payroll costs to increase to £ 405 million ($ 500.9 million), depending on how long the locking action takes. The company pays employees who are sick with coronavirus or in isolation, and has placed all workers over the age of 70, vulnerable or pregnant, on 12 weeks paid leave.

To cover 50,000 absentees, Tesco has recruited 45,000 new employees in the past two weeks.

Online sales have grown three times faster than in-store sales, but the growth is less profitable, given the costs associated with assembling and shipping orders.

In a call with analysts, Lewis said that Tesco had added an additional 145,000 home delivery slots weekly, allowing it to make 805,000 shipments every week, or 20% more than before. The average number of items per online order has reached around 62, after surging from an average of 45 to 130 during panic buying weeks, he said.

The full financial impact of coronavirus “is impossible to predict with a high degree of certainty,” Lewis said, adding that Tesco has a team that is trying to model the impact of the crisis that can occur on future supply and demand.

“If customer behavior returns to normal in August, it is likely the headwinds of additional costs arising in our retail operations will be largely offset by the benefits of rising food volumes, a twelve-month business tariff reduction in the UK and prudent operations management,” the company said in a statement.

Other UK retailers might also find that the boost from additional sales is offset by lower profitability in existing businesses, said Bruno Monteyne, a senior analyst at AllianceBernstein. This would be very true in Britain, which has a more generous labor policy and worse pay than the United States, added Monteyne, former director of the Tesco Asia supply chain.

Tesco will pay a dividend

While banks and insurance companies have canceled dividend payments to prop up their balance sheets in the face of a sharp economic downturn, Tesco, which reported earnings on Wednesday, said it would pay a full year dividend of 9.15 pence (11 cents)) per share, at a cost of £ 635 million ($ 785.5 million).

The company said profit for the year to February fell almost 19% to £ 1.3 billion ($ 1.6 billion).

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