Bumper March and Easter may not be enough to secure supermarket profit boost

Linda J. Dodson

Supermarkets are the few uncontested winners of the market turmoil since the outbreak took hold, raking in billions of pounds in sales. The nation spent more money on groceries in March then it ever has at Christmas. The sunny Easter weekend has kept tills ringing. 

But supermarkets have also attracted particular ire because they benefit from a business rates holiday granted to all retailers, while being among a handful allowed to stay open and netting bumper sales as customers have rushed to stock-up. Together, the UK’s grocers are in line for a £3bn tax break. 

In contrast, many high street retailers, which sell clothes and shoes, have had to shut their shops – with big names such as Next and River Island not even selling online anymore (although the former is poised to reopen its website soon).

Unsurprisingly, Tesco’s decision to press ahead with a £900m dividend last week raised eyebrows in the sector. “We do see the dilemma,” says Clive Black, a retail analyst at broker Shore Capital. “However, it is a finely balanced decision and in light of the fact that Tesco and others are taking on costs to feed the nation well in excess of business rate relief, not furloughing people or participating in UK government financing initiatives, and supporting food banks and charities, it is not unreasonable.”

Beyond business rates relief, companies can also defer their VAT bill or put staff on tax-payer funded leave. One analyst points out that in order to claim the moral high ground, grocers could turn down the cash that is being offered by the Government. 

Shore Capital’s Black thinks the reputation of British supermarkets will be “justifiably enhanced” in the eyes of shoppers having kept the nation fed. 

This, however, could be overshadowed by their decision to absorb the tax break while weaker rivals topple. 

But while it might be an option for some companies, the harsh financial reality of running a supermarket in a hyper-competitive grocery arena makes it almost impossible to turn down rates relief.  

The grocers have to keep prices low to lure more shoppers to their stores while preventing day-to-day running costs from going higher. 

If Tesco is anything to go by, the recent numbers suggest that business during the coronavirus has not been as rosy as might be expected. The savings from business rates (£585m) will be offset by the extra costs it is incurring to keep its stores open. Tesco predicts costs could be between £650m and £925m higher than expected, depending on how long the lockdown goes on for. This is mostly because it said it would pay a 10pc staff bonus and because it hired a further 45,000 staff to cope with demand while paying full wages to those who are sick or unable to go to work (who number around 50,000). 

Other supermarkets are looking at similar costs. Together they launched a hiring spree of 44,000 to keep up with the extra work needed to keep shelves stacked during the worst of the stockpiling. They also promised similar salary increases to thank staff, while a chunk of their workforce is unable to turn up for work because of coronavirus. 

Meanwhile, although Tesco saw a 30pc uplift in food sales in the first week of the crisis, clothing and fuel sales fell by 70pc. 

Profits margins in food are wafer thin, while its higher margin general merchandise is being shunned. This, coupled with higher costs, means that it is possible that Tesco might suffer a hit to its profits even as it has customers literally queuing up outside its shops. Its rivals will not fare much better. Some winners, however, will be cornershop chains and independent stores that are closer to customers’ homes. 

Analysts still expect supermarkets to benefit from higher sales over the coming months, as people are now eating all of their meals at home, but even this trend could trail off as people eat through their coronavirus stockpile and become more reluctant to spend money as the economy inevitably worsens. 

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