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Hello, and welcome to the Tesco First Quarter Trading Statement Call. [Operator Instructions] And just to remind you, this call is being recorded.Today, I am pleased to present Dave Lewis, Group CEO; and Alan Stewart, Group CFO. Please begin.
Thank you. Good morning, everyone, and thank you for joining Alan and I. It's a very busy day today, so I'll keep my remarks brief so that we have plenty of time for your questions.Pleased to report that our growth plan is firmly on the track that we set for it, and we've now grown sales for 10 consecutive quarters in the U.K. and Ireland and for the group.Like-for-like sales for the group were up 1.8%, which is our highest rate of quarterly growth since 2011. In the U.K. and ROI business, like-for-like sales grew 3.5%, stepping up as we gain access to faster-growing parts of the market through Booker.Total business growth in the U.K. was over GBP 300 million, significantly ahead of our competitive set. We're beginning to realize the growth opportunity of the merger with Booker sales at 14.3%, thanks to strong underlying performance and new business wins.In our wider Tesco business, sales were up 2.1% in the U.K., driven by growth in food. We continue the relaunch of our own brand ranges, and towards the end of the quarter, we made a further price investment in our fresh food.We've also taken some important decisions to strengthen our mix, in particular with the closure of Tesco Direct as we exit an unprofitable platform and emphasize those areas of general merchandising which are more sustainable such as homeware and cookware.In the Republic of Ireland, we delivered a 3% growth, with customers responding very positively to our more competitive pricing. It's a particularly good performance given the challenges from the weather at the start of the quarter, which closed all of our stores for a day.Turning to Central Europe. The underlying business is strengthening, with continued positive growth in fresh food and basket sizes increasing. The headline sales number, down 1%, reflects the impact of regulatory changes in Poland, our largest Central European market, where we lost 6 trading days due to restrictions on Sunday openings; and in Slovakia, where we had 4 days of restricted opening times.In Asia, again, customers are responding positively to our investments in lower prices, and fresh food sales grew by 4.5%, with a particularly good performance in Malaysia. Looking at the quarter as a whole, Asia sales were down 9%, impacted by our decision to step back from bulk-selling in Thailand, which we annualized in April.And at the bank, sales grew by 7%, with secured lending forming an increasingly significant part of the portfolio. Mortgage products now comprise 27% of the overall lending portfolio, which is up more than 4 percentage points year-on-year.So a good start to the year and exactly where we planned to be. We're well placed to deliver on our plan as we continue to further strengthen our offer to customers through the current months.Thank you for listening, and I'll hand back to Hugh now for your questions.
[Operator Instructions] Our first question is from the line of Bruno Monteyne at Bernstein.
Dave, three questions for me, please. The Booker growth is a big step-up from previous quarters, a very rapid step-up. Is that largely due to the impact of, like, your plans related to the merger? Or is there some one-off because of the Palmer & Harvey business going bust before? Can you give us some color about whether there's a new rate for Booker for the [ few ] quarters or a blip? The second question is around Thailand or Asia. I mean, quarter 1 last year was one that really went big negative minus 6% and another negative on top. I thought you'd been annualizing against the bad quarter in Asia and things would start getting better. Can you explain that? And the third was on online grocery, you call it Home Shopping in U.K. You don't provide numbers, but can you sort of indicate whether you're keeping market share within your overall U.K. online food market? Or whether you're still stepping down on that?
Okay, very good. Thank you, Bruno. So look, to your Booker question, I think it's actually, in fairness, a combination of both. I think we're starting to see some of the benefits of the plans. We talk in the release about some of the things that we're particularly doing to help the service levels and performance of the Booker business. But it's obvious that some of the new business wins have come because there's been changes in the marketplace, so I suspect that's contributing in a one-off sort of way. So we are happy with the underlying business performance, as I said in the script, and we're winning new business as well. But as you say, that's a significant step-up from where Booker has been historically. In Thailand, if you go back to last year, it was 6% in the first quarter, but then it actually got stronger, i.e., the decline got stronger in Q2 and Q3, and that's because we started in April, so there is still some annualization of that. And the other thing that you'll see is that we are making some investments in Thailand, particularly around fresh food. So we made some price investments in the first quarter of this year as well. So it's a combination of those 2 things which are impacting this year's number. And in terms of online shopping, growth is around 4%. Really very happy with the fact that basket size is increasing, and actually, subscription rate, too, as we say, they continue to increase, though, better quality. In terms of market share, we're holding market share in grocery and shopping.
And then back on Asia, Dave, your Asian segment is the most profitable in terms of operating profit as per your disclosure. Is the kind of declines you see actually because you're optimizing the business? Or are you running the risk of having operational deleveraging in Asia and Thailand?
No, it's not an issue in terms of -- look, obviously, it's a trading statement rather than a margin statement, but there's no issue in terms of operational deleverage. We saw the benefits in the margin last year of changing the mix. And what you're seeing here is just finishing that mix element and then a second and subsequent investment in fresh food, and I'm seeing the volume come back. That's a model that you've seen in other parts of our business.
Our next question is over to the line of Andrew Gwynn at Exane.
Two quick questions for me. So the first is just on the like-for-like for Booker. Could you give us the ex tobacco like-for-like? And the second one just comes back to the -- obviously, in the statement you mentioned, there's a little bit more price investment going into meat and fresh. So what's the logic behind that? How material is it? I think I saw in the wires this morning inflation in Q1 of around about 2%. So should we sort of gear ourselves up for a significant deceleration of that? Or are we really just sort of talking at the margin?
So in Booker, if you look in the trading update, Andrew, you see 14.3%, including tobacco; 12.4%, excluding tobacco. And in fresh, it's the continuation of what it is -- you've seen from us over the last 3 years. As we improve the business, we see an opportunity to invest for our customers, we continue to do so. So that's a continuation of what you've seen from Tesco, and we did that towards the end of the -- the very end of the quarter. The -- in terms of -- I think what we talked about in terms of -- I was asked earlier by the media what we'd seen. I think the range of different estimates I see are somewhere between 1.8% and 2.4% in the marketplace. We obviously don't give any views on inflation. We try to minimize it. And that was compared to, I think, second half, the very end of last year, where it had actually got slightly above 3%.
Our next question is over to the line of Charlie Muir-Sands at Deutsche Bank.
Three quick questions. The first one is just to clarify that comment on inflation. So you're saying that you feel that market inflation is around 2%. I wondered if you felt at least from the exit rate that you are still improving your price relative position. Secondly, you've obviously announced the plans to close Tesco Direct. You haven't given the size of that business in recent years, but I wondered if you could give us some help there, including also what kind of sales transfer you might hope to achieve back into the stores or the dotcom business. And then thirdly, you called out a positive like-for-like sales in the clothing business, which is clearly very impressive given the weather we've had. I just wonder whether you could talk particularly about why you think you're performing so well in that category.
Okay. So let me -- so in terms of inflation, we only ever really talk about market inflation. From a business point of view, we -- as you know, we don't try and forecast or give a view. We try and minimize it for our customers. And particularly, for me, we continue to ask ourselves, have we got a competitive offer? And we continue to think we have a competitive offer, and that's what we see in the group or the business. But it's always a constant adjustment, and that's why I call out the fact that we made some price investment at the very end of the quarter. But that's been a feature of the last 3 years. We've dropped our prices by more than 6% over that period, and we continue to look to invest. So quite happy with where we finished the quarter in terms of competitiveness. While I talk about clothing, I'll let Alan talk about Direct. Clothing, the F&F brand continues to perform really very well, so you've seen it in terms of growth. The bit that I like is the quality is also improving, with 87% of the sales being full price, which is up 140 basis points. The feedback we get is range, quality and price have all stepped up significantly over the last 3 years, and we're getting really strong customer appreciation for that. So that's what's driving the clothing business. Alan, do you want to talk about Direct?
Yes. Charlie, in terms of Tesco Direct, it's around a GBP 400 million business, and we don't expect any real transfer into the rest of the business. Well, there is -- there are some products which are available through the Grocery Home Shopping order, but at this point, they're very, very small. It's an area, as we said, we'll look at, but -- and we'll seek to match customers' desires with what we can deliver well through the Grocery Home offer. But at the moment, it's really pretty minimal.
We're now over to the line of David McCarthy at HSBC.
Just wanted to ask about pricing again. You've obviously had all the income from the suppliers starting to flow through. Charles finished his negotiations in March. So can you actually quantify the investment you've just done into pricing that you've just talked about? Is it GBP 100 million, GBP 200 million? You often do give us a figure. And has that improved your relative price position, yes or no, versus your key competitors? And then finally, have you done anything on pricing at Booker? Have they had any benefit through from the benefits of the supplier income?
Okay. So David, just to help, so I think Jason and Charles had the first conversations with suppliers in March. They're not complete. And so I don't want you to get ahead of yourselves in terms of what I think your phrase was: the flowing of funds. That's not the position that we're in. So the investment has been a continued investment. I don't think I've ever given hundreds of millions as a guide. Actually, I'm more interested in what it is we do to the relative basket. So the investments we've made have sharpened the competitive position in the -- at the end of the -- of our first quarter. We continue to look for opportunities to do that. So if, as you say, as a result of supplier negotiations, we have more opportunities, then you could see that being invested in price. I think the other bit, David, to call out when we talk about our competitive position is what we're doing with the own brand and the relaunch that we referred to. So we're at just under 3,000 SKUs into a 10,000 SKU relaunch of the brand. We'll finish that by the end of this year. And by the positioning of the Exclusively at Tesco brands, we give a much stronger value proposition for our customers as well. So that's another way of investing in price. The -- at the moment, there's been no price investment in Booker for the reasons that I stated before. We're not a place where synergies are being realized to be reinvested. So that's really where we are. It continues to be that constant adjustment. As you know, we look at the price basket in very many different ways on a weekly basis, and we adjust where we see either opportunities or on rare occasions now where we might see a competitive need.
We're now over to Dan Ekstein at UBS.
I've got 2 questions, please. First one, I think at a supplier conference in the past couple of weeks, you guys were telling suppliers that there was going to be another phase of the Project Reset with potential further rationalization of the supplier base. I wonder if you could talk a bit more about your plans there and what it means for both customers and suppliers. And then the second question is on promotional intensity. Do you -- would you agree that you've become more promotional in the past 6 months than perhaps the prior? And if so, how does that fit into your overall trading statement?
Okay, Dan. So look, in terms of suppliers, I think 2 things to say. One is there's a constant review of categories that goes through the retail business. What we were talking about, though, in terms of the supplier conference was we continue to look at our range through 2 particular lenses. The first is very customer-centric. Have we got the right range always available, and that means being prepared to give more space to the lines that matter most. And we continue to see opportunities to do that. So if we put -- if we've got range which is not productive that's taking up the space at the volume that we need for the highest selling lines, then we'll continue to change the portfolio accordingly. I think the second thing is, and significant, we talked about having a smaller number of suppliers that we work with more strategically over a long tenure, and that's what we continue to do. But we've been doing that over the last 3 years. And in the supplier conference, we just updated people on where we are. So for us, that feels like business as usual. And it also, I think, is what our suppliers expect of us given the strategy we set. But it's all about being much more available for customers all the time, but also in a partnership that people -- both parties are happy to invest in given medium- and long-term opportunities. And then in terms of promotional intensity, no major change. I think promotional intensity for Tesco over the last 6, 9 months has been around sort of 34%, 35%. So there's not been any major change in there to -- for me to comment on really.
Sorry, the one thing I'd add, Dave, just in terms of the promotional impact, the -- we're always interested in how it feels to a customer. And obviously, from our perspective, which is invisible, is what it's -- how much we're investing in that promotional activity. So from the outside, it might always look as if it's shifted a little bit, but when we actually -- the way we measure it in terms of costs and, as Dave said, the 34%, 35%, no change. But the important thing is what does the customer feel when they see that promotion.
We're now over to the line of Dusan Milo at Berenberg.
Just 3 questions for me, please. The first one, in regards to your own label rebranding initiatives, you've done around 3,000 SKUs up to date, but can you please tell us what percentage of sales have you touched with this initiative? And also, if you can give us any KPIs in respect to what customer response was in respect to these rebranded own label ranges? The second question is on Booker. It's pretty clear that the consolidation is helpful, of course, but doesn't that make you a bit more confident in respect to delivering the revenue synergies you were guiding on in the prelims? And the final question was a just follow-up on Dan's earlier question. The recent supplier reset, I think what Dan is referring to is probably the fact that it's more kind of going to be more of a supplier reset as opposed to the range reset. And suppliers I spoke to don't see kind of as an ongoing process but more as a kind of acceleration in that process of consolidating supplier base. So just wanted to make sure if we've understood that correctly.
Okay. So Dusan, if I -- I'll take them in order. So in the own label relaunch, we've done about 2,850 of 10,000. In terms of percentage of sales, I think it's just above 30% of sales because of the different category sizes against those SKUs. The KPIs we've used were a lot in the development. And there are some which are category-specific around design and quality. You remember back to the Markets Day and other, I've given guidance on quality specifications that we set for the 3 tiers, so we have to make sure that we deliver on those and we test against it. And then obviously, we look at and we track the measures in terms of trial and repeat rates as we introduce them across, and so far, so very good. I'm very encouraged by what I've seen. In terms of Booker, look, as I said, we're happy with the way things have started. We remain committed to the synergies that we put into the merger case. But since then, we've also said that we saw -- our aspiration was higher than that in terms of the GBP 2.5 billion opportunity, and we continue to be aiming for that and the first 10 weeks have been pretty good in that regard. So no need to change it, lots more to do, but pleased with the first steps. When you talk about supplier resets, it's true to say, if you go back to 2015, there was an element of supplier reset and a category reset. So I think I was very clear when we said we wanted to change our approach to commercial income, that what I wanted was a longer-term, more strategic relationship with our suppliers. We entered into, a number of us, some didn't enter into that and fell away. So this is a continuation for me of what it is we've continued to do over the last 3 years. A critical thing is we want the partners that want to be able to invest in our business and innovate for our customers. And we've seen opportunities to do that, and it's a constant reshaping of capability across the portfolio. The critical thing for suppliers is that we do that in an open and a transparent and a fully engaged way, but obviously, there's a strong commercial element to that.
Very clear. And just as a clarification, 30% of sales, that these initiatives have touched, that's 30% of own label sales?
Correct.
Or 30% of sales -- own label sales?
No, no. Yes, of the own label sales, it's 30%. Sorry, I thought that was your question, yes.
Yes, yes, absolutely.
We're now over to Rob Joyce at Goldman Sachs.
Just 2 for me. Just firstly, on Booker and the growth, I wonder if you'd give us a little bit more clarity on the mix there. I just remember this time last year, Booker said they had some very high growth again, but mainly driven by the drinks category, which wasn't really profitable growth. I was wondering if there's anything in here we should -- should we think of this as profitable growth or growth mainly in categories that aren't high margin? And then the second one is just to clarify on the pricing message. Did you say now year-over-year your relative basket is more competitive versus the rest of the Big Four?
So Booker, it's pretty broad range. It's not one category focus, and that comes from winning new business as well as strengthening underlying business. So it's not skewed to any particular category, Rob. I see across all the core all grocery as well as BWS, beers, wines and spirits, and others, so it's broad. In terms of pricing, I didn't make a relativity to the Big Four. What I said is I'm very happy with how we exited the quarter in a relative price position. I can't precisely remember where it was when we exited Q1 last year. I'd have to go away and have a look, but all I can tell you is I'm happy with where we are in terms of our price positioning as we stand today.
Okay. So you're not seeing any of that gap being closed really in the first half of the year?
Which gap?
Sorry, your price -- your relative -- sorry, you're not seeing the relative price position worsen in 2018; you haven't seen that.
No. I think what I was saying is that the price gap changed at the very end of the quarter because we made some more investments in our fresh food.
Rob, so remember that in the first half of last year, we checked -- took the opportunity to invest and improve our pricing position. We were clear as we ended the year in April that's year-on-year we'd improved our relativity, and we were happy with that. And we're saying that as today, we're happy with our relativity.
We're now over to Xavier Le Mené at Bank of America Merrill Lynch.
Most of my questions have been answered. Just one, actually. Can you comment a bit more the volume trend of what you have seen in the U.K. recently? And if you can give us a bit granularity fresh versus ambient food?
So Xavier, I think what we've been trying to do, especially as we bring Booker in, is sort of move on the measure. I'm very happy with the volume in the business. But I look at the volume in a quantum across all of Tesco's business. That's why we try to give you some of the insights. Our sales growth in the quarter was more than GBP 300 million. And if I look at that quantum versus the competitive set, it's a significant quantum greater than any. And that, I think, is a better proxy than getting into segmental breakdowns of volume piece by piece. So overall, I'm really very happy with the volumes. It's translating into good -- very good conversations with suppliers. But it's the quantum of sales growth that, for us, is crucial and at more than GBP 300 million, it's more than a number of our competitors combined.
We're now over to James Anstead at Barclays.
Two questions for me, if that's okay. Firstly, I think Tesco Direct has been losing money for quite a long time. So I just wondered what prompted you to take the action to close it now rather than 2 years ago, 5 years ago. Any comment on that? And secondly, I know that headline like-for-like sales isn't necessarily the most relevant way of thinking about the underlying sales trend in Asia. But is it realistic to get back to flat like-for-like sales at some point this year? Or is the impact from deflation and welfare cards likely to be too heavy?
Okay. So James, let me help. So look, I think it's fair to say I don't think Tesco Direct has ever made money. So your question is right. I think, very candidly, when we set out the plan 3.5 years ago, we felt that we had bigger priorities and where we should put our efforts earlier. We also tried to make an investment at Fenny Lock, which was trying to address the underlying profitability, so we gave it one more go to try and change the economics of the whole structure. It didn't work. It made it better. It lost less money than it used to, but it still lost money. And so actually, it was all about timing where it sat in terms of its materiality and the pecking order of things that we wanted to change in the business. And I think I've said a number of times that one of the things that Alan and I and the team have been trying to do is set over a period of time what to change when so that we don't lose any of the operational cadence as we make these changes. So it was really a function of that having tried to resurrect the profit and not being as successful as we would have liked to be. In terms of Asia, look, I think Q1 bulk-selling finishes in April. We get back to a place where, at the moment, our impact in Q1 investment is around 2% of investment, so deflation is around 2%. I don't see that being projected through the course of the year, so we do see Asia coming back. The bit that we don't know, James, is exactly what will happen in terms of welfare cards. That's something obviously in the hands of the government. So we'll watch it. But I'm really very encouraged by the volume growth in fresh food from the investment that we've made if I look at the underlying business. And that's a way of operating that you've seen from us in the U.K., in Ireland and in Central Europe. So we've got some track record with that.
We're now over to Nick Coulter at Citi.
Two for me, please. First, can you talk about the decision to roll out the big pack grocery into another 50 stores, kind of that process and how you tweaked the offer as you've gone along? And then on Chef Central, how does Beckton differ from Bar Hill? How has that offer moved on to the second trial?
Okay. So actually, just because it will help, I'll do them in reverse, if I may. So Chef Central Bar Hill was completely segregated. It was done that way because of being able to prepare whilst the merger was still being finalized. When you go to Beckton, you'll see it's not -- it doesn't have a wall separating it in the same way. So it's actually incorporated into the Tesco store. So that's the evolution of that. It lowers significantly the cost of setting it up. And [ Sean's a bit ] -- if you remember, I said the payback on Chef Central Bar Hill was 6 months. If the sales rates are similar in Beckton, then the return on investment will be even shorter. In terms of the big pack extension into 50 large Tescos, it's really been -- the things that have been modified have been mainly around range, Nick. As we've tried things, some things have worked, some things have not been quite right, so we constantly were modifying the range and just judging sort of customer reaction because in those stores, we see some local catering participation, but we also see Tesco customers taking part. And roughly, at the minute, about -- as we roll out, 75% of the range is working really very well, 25% of it is we tweak as we take it into different stores would be a sort of rule of thumb, but very early days.
But in totality, given that you moved from 2 to 50 in quite short order then, the trends in the space productivity must be encouraging, I suppose.
Yes. But as I said last time, the sales densities of what we put in so far are being -- have meant that they hold their own, so, so far, so good.
And then on -- if I may, just on Beckton, is there a minimum spend? How has that side of the experience evolved from Bar Hill, which, obviously, had different tills within Bar Hill? I'm just wondering how you manage that.
Yes. No, now it's through the same transaction.
Before going to the next question, which is Stewart McGuire at Crédit Suisse [Operator Instructions].
Can you just clarify the 87% of clothing at full price, that's up 140 basis points, I think you said? That's question number one.
Correct.
Question number two, there's no mention of volume in the release at all, and I guess that's a backdoor way of saying what's your inflation rate? But can you speak a little bit about volume, give us a little bit of color? And then question number three, completely off-piste here, you called out the bank and the improvement in secured lending. Can you give us any color as to what that might mean from a profitability perspective? Understanding this is a trading update, but given that you've commented on secured lending, that would be great.
Okay. So look, first one, it was 87% full price, up 140 bps. I think that goes back to just really very happy with the way the team are managing the F&F brands. Quality and range, very strong feedback, and as we get that right, not necessarily to have so much volume on sales, but that's a 3-year trend of improvement, very happy. Look, in terms of volume, we talk about total quantum. We don't want to get into giving any views on inflation for the reasons that I've said many times. And now that we have a business in the U.K. which is across the channel that it is, we think it's better to be talking about the total quantum of growth that we're bringing, and that's why I go back to the more than GBP 300 million of sales growth. If I look at the volume under that across the business in the U.K., I'm really, really very happy. And as I say, the quantum of growth, which comes back into the volume of what it is we're doing with our suppliers, is significantly greater than a combination of our competitors. So that's how we'd increasingly want you to understand what we're doing with the business. Within that, fresh food continues to be the focal point. We continue to make the investments and are happy with the performance there. And in terms of bank, I obviously can't say anything about profitability and I wouldn't. I think the reason we put the mortgage rates in is we've had questions before about what is the composition of the assets in the bank. And I think as we talk to people about how much secured lending there is, 27%, up 4 points, that seems to be the thing that people are most interested in. And we've been very clear that our -- the strategy for the bank is that we'll increase the proportion of secured lending this year and in the years ahead. So Stewart, that's the only comment I can really give you on the bank at this stage.
And that was the final question for today's call, so back to you for any closing comments.
Thanks very much, Hugh. Look, as I said earlier, thank you for your time this morning. From a Tesco point of view, our growth plan is firmly on the track that we set for it, and we're pleased with the start of the year. It's our strongest quarter since 2011 and our tenth consecutive quarter of growth for the group. Our task now is to continue the momentum, keep serving our customers better. We continue to invest in our offer, and we'll continue to do that. So thank you very much for joining us today. And I suspect we won't see you at the AGM later this afternoon, but have a fantastic weekend. Thanks very much for your time.
This now concludes the call. Thank you all very much for attending, and you can now disconnect your lines.