Marketing more important in the context of the cost of living crisis
Tesco says communicating with customers through marketing is “more important than ever” as inflation accelerates to a 30-year high.
Consumer prices jumped 7% on the year to March, from 6.2% in February, according to figures from the Office for National Statistics this week. With consumer wallets tight, brands and retailers are under pressure to keep prices competitive.
“Tesco is at its best when it puts customers first – that’s what we’ve done during the pandemic and that’s what we will continue to do now,” Tesco CEO Ken Murphy said then. that the grocer released its year-end financial results today (April 13).
“In a difficult environment for our customers and with household budgets under pressure, we are focused on controlling the cost of the weekly shop – working in close partnership with our suppliers, while doing everything we can to reduce our own expense.”
However, Murphy told Marketing Week that the grocer doesn’t see marketing as a cost to be cut.
“We don’t see marketing as a cost, but rather as an investment in communicating with our customers and that’s more important than ever right now,” he said.
Tesco has been “really pleased” with the effectiveness of recent campaigns, Murphy, of “Aldi Price Match” and “Clubcard Prices”, added to its Ramadan and Easter campaigns. The Aldi Price Match initiative has been extended to around 650 lines, while all of the supermarket’s promotional offers are now run under Clubcard prices.
Our commitment is to stay really close to the customer [and] what the customer needs and respond as we go. I think we are as well equipped, if not better than anyone else in the market to respond.
Ken Murphy, Tesco
“Customers have responded very well [the campaigns] and that contributes to the overall improvement in the perception of our brand,” he said.
Indeed, Tesco claims to have achieved its highest Net Brand Promotion (NPS) score to date, while improving its overall Brand Health Index score by nine basis points (bps) from a year to year. According to the grocer, the index scores of its competitors fell by 54 basis points on average over the same period.
On a two-year basis, Tesco said its Brand Index was up 413 basis points, compared to an average of 132 for competitors.
On value perception alone, Tesco claims to outperform the market by 91 basis points. The grocer also improved its perception of quality by 11 basis points, against a market decline of 32 basis points.
In terms of market share, Tesco said it made gains in the UK, Republic of Ireland and Central Europe, including a 30 basis point increase to 27.7% in the UK. Online, Tesco increased its share by 142 basis points to 34.8%.
Looking to the year ahead, Murphy said information from Tesco suggests customers are already anticipating changes to the way they shop, but it’s too early to predict exactly what those changes will be.
“It’s still early [but] we’re going to be watching this very closely because we’re seeing that customers are already starting to look at how they’re managing their budget and they’re starting to compromise,” he told reporters this morning.
“It’s an evolving situation and it’s very dynamic. And so our commitment is to stay really close to the customer [and] what the customer needs and respond as we go. I think we are as well equipped, if not better equipped, than anyone else in the market to respond.
In October last year, Tesco shared the four strategic priorities which the company believes will help drive growth in turnover and profits over the next few years. Today, Murphy said the company has already made “good progress” on those goals.
The four priorities were to provide ‘magnetic value’ to customers, create ‘competitive advantage’ through the Tesco Clubcard, convenience and cost reduction.
On value, Tesco said it now claims its strongest price position in the UK in six years, while its selling price index has improved by 70 basis points since the last year. This was achieved through the Aldi Price Match initiative, with Aldi Price Match products present in 99% of large baskets, the relaunch of “everyday low prices” on 1,600 lines, with a particular focus on products household, health and beauty, and Clubcard prices. Tesco reports ‘strong interest’ from brands in new media platforms
“Thanks to our consistent focus on value over the past few years, Tesco is now a destination customers can trust to spend less in their weekly shop,” Murphy said.
“The combination of price matching, everyday low prices and Clubcard prices gives our customers less reason to buy elsewhere.”
However, providing magnetic value is about more than pricing, Murphy added. As such, Tesco has also made strides to deliver “better quality, healthy and sustainable products”.
The grocer continues to reformulate its products to provide healthier choices, with an additional 7.7 billion calories cut over the year. Meanwhile, sales of Tesco’s premium own-label range, Tesco Finest, rose 9.3% on the year, with the range supported by the grocer’s ‘Food Love Story’ campaign.
Tesco has also removed 1.6 billion pieces of plastic to date, launched the UK’s first national soft plastic recycling network in March 2021 and introduced electric vehicle charging stations in 500 UK stores.
Meanwhile, Tesco says Clubcard card penetration grew by 390 basis points year-on-year, following the launch of Clubcard prices in Tesco Express stores in May, alongside the decision to bring the price commitment to Tesco Mobile in September and to Tesco Bank in October. Nine million customers now access Clubcard via the app, compared to 2 million two years ago, while Clubcard households reach more than 20 million.
“We see a lot more ways to innovate in order to create a much richer experience [with Clubcard]”Murphy said.
Elsewhere, Tesco’s convenience strategy sees online sales remain “significantly” ahead of pre-Covid levels, at 1.2 million orders a week. Murphy noted that online sales as a percentage of sales hit 15.5% at the height of the pandemic and have now stabilized at around 13% – still well ahead of the 9% seen before the pandemic.
We don’t view marketing as a cost, but rather as an investment in communicating with our customers, and that’s more important than ever right now.
Ken Murphy, Tesco
“We are really pleased with the resilience of our .com business and of course this behavior is now embedded in our customers,” he said. “I think customers are going to be really, really committed to this .com proposition.”
The grocer also added 102 new “Click & Collect” locations during the year, while its “Whoosh” fast delivery service is now available in more than 200 stores, and will expand to another 400 this year. Tesco also has a partnership with Gorillas, a third-party fast delivery service.
Murphy said Tesco is seeing “very strong customer adoption” of fast delivery and remains “curious” to see how this proposal will pan out.
“We’re very curious about the model in a world where restrictions have been lifted and customers are looking for value,” he said. “I have no prediction on [how it will evolve]. We’ll just wait and see. That is the purpose of a trial and we will stay close to that.
However, Tesco’s plans to expand Whoosh to 600 stores in the next financial year are an “indication” that the grocer believes “the mission is here to stay”, Murphy added.
Annual results and future forecasts
In its 2021/22 financial year, Tesco saw group sales increase by 2.5% to £54.8m, an increase of 3% at constant rate. Revenue rose 6% to £61.3bn, while operating profit rose 65.5% from £1.5bn to £2.6bn sterling.
In the United Kingdom and Ireland, like-for-like sales increased by 2.2%, or 8.8% over two years.
Looking ahead, Murphy said Tesco was “confident” that its strategy will enable the business to deliver sustainable growth and generate strong free cash flow at retail.
However, given the ‘significant uncertainties’ of the current economic environment, Tesco has given a wider than usual range for its retail profit forecast of between £2.4bn and £2.6bn. for the 2022/23 financial year.
That range will depend on a number of factors, Murphy said, including the extent of further “normalization” in customer behavior as the world emerges from the pandemic, the level of cost inflation Tesco is experiencing and its ability to partially offset it, and the investment required to maintain the strength of its price position relative to the market.