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Tesco PLC
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Ladies and gentlemen, thank you all for standing by, and welcome to today's Tesco first quarter results call. [Operator Instructions] Just to remind you, this conference is being recorded. I will now hand the floor to our host for today, Mr. Dave Lewis, Chief Executive Officer. Sir, please begin.
Gino, thank you. Good morning, everybody, and thank you for joining us. As usual, our CFO, Alan Stewart, is with me this morning. This will be my last trading statement, and I might say a few words about that after the Q&A. But first, the trading update. Tesco is a people business. And in every trading statement since joining in 2014, I've tried to recognize the contribution of more than 400,000 colleagues that work for us around the world. Never has that been more appropriate than now. In the most extreme circumstances, our colleagues have been completely selfless in their commitment to serving shoppers better and keeping food available for all. On behalf of the Board, the senior team and dare I say everyone, I'd like to say a heartfelt thank you to each and every one of them. They have been and continue to be awesome. The results of Q1 clearly show the impact of the pandemic and the unique competitive advantages of the Tesco business model. Let's start with the U.K. and Ireland, where total sales increased by 9.2%. Growth in the U.K. was driven by a 12% increase in food sales, offset by discretionary categories such as clothing, which declined by around 20%. In the U.K., we continued our long-term strategic investment in our value proposition with the launch of the Aldi Price Match in March. With our focus on everyday low prices and strong availability, promotional participation reduced from 28% to 14% as we continue to look at opportunities to bring even greater value to customers, including by extending our Aldi Price Match to nearly 500 Tesco and branded products. Our Price Match allows customers to get Tesco quality at Aldi prices or better. Customers tell us that they see through Aldi's misleading price comparison of branded goods in the Big 4 versus Aldi's own label. That proposition, together with our wider range and the feeling of safety shoppers feel in our stores, has resulted in positive switching from Aldi into Tesco for the first time in over a decade. The embedded reach of the U.K. business and the investment and capability we've made over the last 5 years was also invaluable in the first quarter. The investments in the grocery home shopping website, picking algorithms, delivery-planning software as well as the additional 12,000 pickers, 4,000 drivers and 400 vans that we brought in enabled us to ramp up our online capacity, increasing total slots from around 600,000 to 1.3 million in around 5 weeks. This allowed us to support 590,000 vulnerable customers with slots as cheap as GBP 2 in their hour of need and were significantly cheaper than some of the solutions offered by our rival. The U.K. online business grew at almost 50% in the quarter, rising to nearly 100% by the end of the period. In convenience, growth was strong, up 9.9% as customers look closer to home for bigger baskets of essential food. In large stores, transactions declined by 33%, but basket sizes grew by 57% as customers reverted to a bigger weekly shop. Our range, availability and safe shopping environment were appreciated, and it's reassuring to win The Grocer awards for service and availability for the second year in a row. Investments in loyalty and technology are paying off. Clubcard Plus, pre-COVID, showed an increase in incremental basket size that was 3x our prelaunch assumption and now presents even greater value given the rise in basket size. The growth in card payments were significant, with 72% of payments made by card versus 61% in Q1 last year. The increase in contactless limit to GBP 45 helped, but the real differentiation was Tesco Pay+, which allowed contactless payments up to GBP 250. In Ireland, sales grew by 19.7% driven by a larger portion of out-of-home consumption transferring to retail sales. Online growth was also significant, reaching 62% in May, and the investment in a safer shopping environment was clearly appreciated by our Irish customers. At Booker, sales grew 6.1% with significant growth in retail, offset by declines in the catering business. Growth in the Premier, Londis and Budgens spaces was nearly 25%, reflecting even more strongly the same trend we saw in the Tesco convenience business of customers buying more food closer to home. While the challenges for the catering industry are clear to see, we're in a particularly strong position to support these customers and expect the -- we expect to exit the crisis with market shares well beyond the original levels. Booker has also supported the Tesco online business, and we added 100,000 click-and-collect slots by using HGVs from the Best Food Logistics foodservice business to create new sites. In Central Europe, sales increased by 3.3%, excluding Poland. We announced last week the sale of the Polish business to Salling Group, which will allow us to focus on our business in Czech Republic, Hungary and Slovakia, where we have strong market positions, achieve margins, cash flow and returns which are accretive to the group. So those are the retail trading headlines from around the group in a quarter of significant change. But if I were to call out one area where the change has been most extensive, it would be online grocery. Last June, we held the Capital Markets Day where we shared the opportunity to double our online capacity in the medium term. At that time, nobody foresaw the circumstances we found ourselves in just a year later nor in fact that we would double our online capacity in just 5 weeks for just GBP 4 million of CapEx. At the run rate we're seeing currently, we anticipate online sales in the U.K. to be north of GBP 5.5 billion this year, up from GBP 3.3 billion last year. The feedback from new online customers has been phenomenal, and we are confident that we can retain this new customer base. We will continue to find new opportunities to scale our business, and we're pleased to announce that our first urban fulfillment center in West Bromwich will begin serving orders next month. The flexibility of our online model with very low CapEx is a distinct competitive advantage. For customers who are able to shop in-store rather than online, we've transformed the whole store to make it as safe as possible. The cost of doing all of this is very significant, as are the costs from self-isolation of vulnerable colleagues, general absence levels and the need to double cover with temporary colleagues. At our peak, we had 52,000 colleagues absent. By the end of the quarter, that had reduced to 32,000. And while absence has continued to fall since, it still remains high. The full year, we said our additional costs for the U.K. business will be between GBP 650 million and GBP 925 million. Our current view is that our U.K. costs will be towards the upper end of that range. Many have written about the business rates relief, and I want to reemphasize that every penny of the relief has been invested in making sure that we're able to protect the availability of food through an extremely difficult period for the nation and ensuring that we're able to provide that food in a safe environment. We have not furloughed any colleagues, nor have we taken government loans or deferred VAT payments. Further afield, there are some additional costs in Central Europe, but also significant was the loss of income from temporary closure of shopping malls. I'm pleased to say these are opening up again already. Looking to the rest of the year, our latest forecast is that retail operating profits will be broadly flat, at a similar level to last year with a significantly different first half-second half split versus last year. At Tesco Bank, capital ratios and liquidity remain very strong. However, some of the external assumptions used to estimate future credit losses have changed, particularly in terms of GDP and unemployment. And so we have increased our provision for potential bad debts. In April, we said that we expected the bank to be loss-making this year. And based on the current macroeconomic forecast, we now expect this loss to be between GBP 175 million and GBP 200 million. Over the last 3 months, our industry has changed beyond imagination. The changes we have seen in recent years will only accelerate. And at Tesco, we have to stay ahead of that trend, running our business as efficiently as we can and keeping our absolute focus on what it is customers want. We also know that our customers have very clear expectations about the type of recovery they want to see as this crisis eases. And that means a green recovery. Our ESG commitments remain as strong as ever. So even where we face some short-term challenges in recent weeks, for example, in our work to remove plastic, we're still absolutely committed to our long-term plans. And through the pandemic, we focused our efforts on making a difference where it's needed most, continuing and extending our support for food banks, the British Red Cross and local community organizations helping to tackle COVID-19. If I can wrap up right back where I started with our 400,000 Tesco colleagues. I'm incredibly proud of the way they've responded in the last few months and the contribution they've made, working around the clock to keep the nation fed. At every turn, they have been -- they have repeatedly gone above and beyond for customers with real humanity and a brilliant community spirit. And I'd like to finish by reiterating my thanks to them for everything they've done. Thank you for listening. And I'll hand back to Gino for all your questions.
[Operator Instructions] Our first question comes from the line of Andrew Gwynn from Exane BNP Paribas.
And I suppose just first off, Dave, a big congratulations in all you've achieved at Tesco. It's going to be a shame to see you go, but all the best for the future.
Thank you very much, Andrew.
Just waiting for the questions -- thank you. Just waiting for the questions. I mean obviously, the online piece, as you mentioned, is a big, big component of it, very, very capital-light. But obviously, at the moment, you're rolling out that -- the UFCs, as you call them. Given there's a big change coming, do you think you'll be rolling out more in the way of urban fulfillment centers going forward? Obviously, you've got 25 in the pipeline, but could we see materially more than that?
Andrew, look, it's a really good question. I think we've got a plan for 25. I visited the one that is being commissioned last week, really quite excited about how that augments and adds to the model. But the core Tesco model is to use our existing assets, the stores that we have that are closer to customers and that will continue to be the mainstay. But if we can augment those stores with some automated picking, we further enhance the economics. So that's the model going forward. It will be a combination of the two. The 25 is an addition of capacity, but the core is still using our stores. So that low CapEx expansion that we've seen by changing our operating model is hugely significant and I think it supports the view we've always had that using our existing assets in this way is the best way of delivering grocery home shopping to the U.K. market.
I just -- sorry, just as you look around the industry, would you anticipate sort of broader changes from the competitors? I mean obviously, you've seen even Aldi going down the online route. Would you think these sort of changes would last? Or in your view is the sector uniquely suited to what you're doing?
I think there's -- look, as I said in the statement, I think we've seen some trends in retail recently before we got to the COVID crisis. I think some of those trends will continue and indeed accelerate as customers change the way they want to shop. So I think it will be incumbent on all businesses to respect that change. I think the -- we gave a pack in addition to the usual trading update because we were very aware that people have not had the chance to see what's going on in the market in the same way that they normally would by being around. So we tried to be a bit helpful. If you look in there, you'll see that we, in the online piece, we do look at some of the comparisons because actually, I believe that Tesco has a competitive advantage in terms of how we deliver. So I don't know whether other people will come into the market. But what I have seen is through the crisis, we offered a delivery to people at GBP 2. And when I looked at some of the other solutions that were out there to try and help, the size and the cost of delivering them was significantly more than the alternative that Tesco was providing. So I think you see there Tesco's unique ability to be omnipresent and commercially very competitive.
Yes, we do indeed. All the best, once again, for the future.
Thank you very much.
The next question comes from the line of Rob Joyce.
Dave, just want to firstly reiterate Andrew's thanks and well wishes for the future. And three questions, if I may. Just the first one, just to follow on, on the online questions. I think -- are you basically saying now you think online penetration at these levels is sticky here? I think the guidance would imply it stays pretty elevated for the rest of the year. And if so, are you able to tell us how you can make this business more profitable? Are you seeing people more willing to pay a higher delivery fee maybe further down the line when things normalize? Second one is just on the promotional levels, which have halved. Again, is this something you see now as a more permanent shift? And how does this impact profitability going forward? And then the final one on Booker, which does look to be making material share gains, as you suggest. I think historically, Booker have said they've got around GBP 2.5 billion or maybe 50% almost of additional capacity within its existing network. Can you give us an update on where this is at the moment?
Okay. Very good. Thank you, Rob. Look, in terms of online, at the end of the quarter, online as a percentage of U.K. sales have gone from 9% of sales to 16% of sales. So close to that doubling that we had seen in 3 years has happened in less than 3 months. And we've been able to match that opportunity. But there was more that we could have gone for. So yes, we do see it sticky. We do see that sort of 20% of the market as being something that's absolutely out there. And we see ourselves being uniquely placed to service it. The feedback from people who are trying our grocery home shopping for the first time has been phenomenally good. So that's why we're confident of it staying. In terms of profitability, look, we know that online is dilutive versus the core, but we've worked very hard over the last 5 years to make it a positive contribution. It is fair to say that in order to expand so quickly because the country needed us to, we relaxed some of that in order to ramp up the availability. But we can see and we have a very clear plan for profitability. There are 2 things that drive that, Rob. One is there are definitely productivity improvements. When you bring so many new people on and new assets on, there's a learning curve, so we can see that. I think we'll also see productivity improvements as people, during the crisis, people wanted to go back to having items individually wrapped. We'll see that come off as things go. So that will change the economics positively again. And there is definitely an opportunity to be more commercially orientated in the way that we put delivery prices together. We did make a decision. We changed nothing. Even though the demand -- we used -- just to give you a fact, we used to get something like 700,000 to 800,000 hits on the website a week. During the crisis, that became 8 million at one point. So there was clearly a lot of demand out there. We took a decision not to change any pricing at all during that period and keep everything as available as we possibly could because we felt that's what customers needed at that time. But do I see a situation into the future where pricing becomes more rational? Yes, I do. But time and place. In terms of promotional levels, look, our priority -- this started from a place which is our priority was about availability. And promotions at a time of the spikes in volume that we're seeing, unhelpful in the supply chain, full stop. So we have and we continue to make availability the priority, and I'm really happy with the levels of availability and service that are there. I genuinely think there's an opportunity in the industry for us to rethink how it is we give value to customers. There's been a lot of volume in food so far. And therefore, the idea of chasing volume through promotions is probably not the most commercially savvy way to do it. We want to be really clear with our supply base that if there is to be some recessionary pressures and potential inflation, that actually, we don't want the historical approach of raising prices and then dealing back into more and more promotional investment. We'd rather try and keep cost increases negative and then reduce the amount of promotions and give everyday good value. You see that in Aldi Price Match. If you look in health and beauty, you'll also see a significant investment in the last 4 weeks to take promotional levels down but give everyday greater value. So strategically, that is an opportunity. We're going to continue to push in that direction. I've given you the year-on-year. But when I started, our promotional participation was over 40%. Your final question, Booker. Look, the interesting thing is I honestly don't know what Charles has said about Booker's stand-alone capacity. What I do know is the combined network capacity is significant. We've been able -- the thing that's been really good through this time is we used 2 mothballed warehouses that Tesco had to support Booker and used them in an integrated way. So I'm not at all concerned about the opportunity and our capability to support market share growth in foodservice. And we gained another site with the acquisition of Best Food. So there's a lot of upward capacity, Rob, across the Tesco Group to support that Booker growth I was talking about.
With very limited to extra CapEx obviously.
Indeed, they are existing assets already. So...
Dave, all the very best.
Thank you.
The next question comes from the line of Andrew Porteous from HSBC.
And Dave, I'll say -- echo everyone else's wishes and their congratulations on a job very well done over the past few years. In terms of questions, just thinking about Booker and sort of building on that. The share gains you're seeing, are they coming from competitors? Or are you taking their business or is it more outperformance due to the fact that Booker has got a lot more independents that have probably been a bit more resilient from a demand perspective through the current period? Second question, could you talk about the impact sort of reduced social distancing would have on the business? I mean does that help you operate a bit more efficiently? And then lastly, just coming back on the economics of online. In a world where basket sizes are, what, really, 30% larger, and you're delivering a lot more orders, and then therefore, your drop density seems -- should be much better, do the economics of online on a sort of continuing basis look a lot better than they were pre-COVID?
Okay. Andrew, thank you very much. If we talk about Booker, look, the -- if you look in the pack that we gave you, I think it's Page 8, the market share -- the 2 points you talked about is the market share in retail increases 24% to 25%. And that's about serving more convenience outlets. You've seen the growth that we've had across Premier, Budgens and Londis. So that's a reflection of just that reach and continuing the great work that's been in Booker for a while. The big growth in catering is partly because we've acquired Best Food obviously but our ability to attract customers. It's -- look, it's -- Andrew, there's -- the opening up of the hospitality sector is delicate for a lot of those businesses and entrepreneurs because they take on a lot of cost as they open when they don't have the full sales potential. And so that puts a huge amount of pressure into that supply chain. And this is a place where quite a lot of the competitors entered the crisis in not the strongest financial position. So relative to our competitors, Booker is in a unique position, operationally brilliant, you know that, but also financially, really, really, really strong. And so as you think about opening up, then Booker looks like a much safer, surer competitive bet than it did before. So we're gaining customers as they think about opening up because we're prepared to invest something in that working capital to support this phased reopening. So that's what we see in terms of Booker, and I'm really, really pleased with the plans that Charles and the team have. In terms of social distancing, look, the truth, Andrew, is we obviously don't know. We've seen the new guidance from the Prime Minister. The team are working through what the consequences are of that. What I would say to you is we've made safety the priority all the way through this. We will not compromise that going forward. So if there are opportunities to improve and ease the shopping trip for customers and make it easier for colleagues, for sure, as a result of the new guidance, we will look into that and take it. But we won't compromise on the safety so let's see how that develops. And look, I think to your point on -- the basket size is interesting, both in large stores and indeed in online. Obviously, we put in a limit for the number of items during the time in order to -- again, to maximize that availability in delivery. That's one of the things that we have the opportunity to revisit as things normalize a little more. But Andrew, what I would say is I think the underlying structure of the business model of using our stores to deliver to home for those people who want it, when I put together stores and then the added benefit of urban fulfillment centers as we grow that capability then the underlying economics, if we can charge, and we believe we can, a reasonable price for delivery, a competitive price for delivery, then actually really very happy with the underlying economics of the grocery home shopping business plan that we have today.
The next question comes from the line of Xavier Le Mené from Bank of America.
Dave, congratulations, actually. All the best for your future. But one question, actually. You're talking a lot about everyday low price or everyday, I would say, value for your customers, we've seen less promotion. So how should we see in 2020? Is it also an opportunity for you to potentially reset prices significantly down and to accelerate sales growth going forward? Does that conceptually mean that going forward, we should expect higher sales growth but potentially lower margin? So that will be my first question. And second one, just on the bank, am I missing something? It sounds like you were talking about GBP 200 million impact from provision in your -- the full year results. But now you're talking about GBP 175 million to GBP 200 million operating losses. So am I'm missing something here? Or is it just due to more provision, more costs? Or if you can elaborate a bit more on the bank.
Xavier, why don't I take the -- your question about pricing and sales growth and ask Alan to comment on the bank for you? So look, the -- we've seen significant volume growth. We've been on a -- you know very well that we've been on a trajectory for the last 5 or 6 years to make Tesco's value proposition sharper and sharper and sharper. So this is just a continuation of what we've been doing. We've got ourselves to a place last year where we were very price competitive and with a good level of margin. I said when I did the results that I saw this year as a year of investment, that we wouldn't be looking for margin expansion, all the improvements in our business, I would invest in increasing the competitiveness of the business. We're investing in a slightly different way to what I anticipated given the COVID crisis, but we've continued to invest in the value proposition, and we will continue to do that. So Aldi Price Match is about setting an easy reference point for customers. They clearly appreciate it. It's working in terms of the switching that we're seeing, and it's helped by the fact that customers appreciate the shopping environment at Tesco at the minute. So it's the right time for us to continue. Think promotions start from a place -- we -- when I started, we had more than 40% promotional participation. It was down to 28%. We've halved it nearly as we've gone through this crisis, first and foremost, to protect availability. Absolutely the right thing to do. But also as we go forward, there's a once-in-a-lifetime opportunity for us to introduce real efficiency back into the supply chain by taking out that noise of promotional volume. And yes, I have been clear that as we face into the pressures post-COVID as an industry, I wouldn't like to see the old model where suppliers look to increase cost prices and then deal something back in increased promotional investment because we don't think that's the value that customers most want, and Tesco needs to step in and champion great value for customers. So we will continue to do that as we walk through this. And I think if the industry were rational, it would do something similar. But as Tesco, we should make our own destiny and lead from the front. And that's how we see this year. So will we see sales volume at -- look, I asked my colleagues last night when I shared the trading statement, when was the last time the Tesco Group was more than 9% sales growth, and nobody could remember. So the sales growth is there. It has some short-term profit impact, but we see that as an investment in our business. Net-net, the idea that we would be around flat year-on-year for our retail operations and with that growth and with the investment in new capability and new value proposition, it would be a hell of a year. And I'd be delighted if that pans out as we plan it. And so far, so very good, really.Alan, bank, do you want to?
Yes, Xavier. In terms of bank, if I can just take us back to April, we spoke about 2 drivers for our view on the bank in April. One was the business activity and the second one was the IFRS 9 provisioning relative to the loan book whether that's credit cards or loans itself. The business activity, there's been no change in terms of what we see. So on -- if you look at Page 10 of the deck, where we talk about the bank, the lines of income, which have been -- we've given you some color on how those shape up, but there's been no fundamental underlying change in that as regards -- and also as regards the new lines we're taking on. Whilst those are down, again, no real change. So all of the change and the firming up in expectation is linked to the provisioning we're making against the existing loan book. The Figure 35 there gives you some sense of how we were looking at the external measures as we saw them and as viewed by the market, and that's what the bank factored in as of April and now. And the 2 key drivers of those are GDP expectations, particularly in the short term, and unemployment. So quite a significant shift downwards in terms of those expectations. Unemployment is expected to be greater. GDP impact, certainly to the current financial year, is expected to be deeper impact. And that drives a more than GBP 100 million increase in provisions from where the position was as of April and where it is now. I would just remind you that this is a noncash impact. It's a provisioning and the liquidity ratios, which we also point out on that slide, Figure 34, and the capital ratios are stronger year-on-year than they were, and that's having taken those extra provisions.
The next question comes from the line of Maria-Laura Adurno from Morgan Stanley.
Just 2 on my side. Perhaps if you can provide us with some comments and updates on the partnership that you have with Carrefour. And then the second question perhaps is with respect to the U.K., you can provide us some comments with respect to how nonfood has been performing and also if you have any comments at both levels with respect to your -- where does nonfood inventory stand and whether you still see risk into the summer of some write-downs.
Okay. Thank you, Maria. Look, the relationship with Carrefour continues. We continue to negotiate together international agreements with the big branded suppliers. The focus over the last wee while has been about looking to the opportunity across our own-label purchases together and business services not for retail. So yes, clearly, a disruption to some of that work because of COVID, but the relationship is -- continues.In terms of nonfood, the bit of color that I could give you is that we started from a position where general merchandising was very strongly down at the start of the crisis, but actually started to improve as we went through. So as you -- if you look into the deck that we gave, we gave some of that category breakdown. So I'm just going to find you the right figure so I can refer it to you. Here we go, Page 4, yes. Sorry, I flipped over that. So look, I -- in that sense, I was pretty pleased with the way that general merchandising turned out, so it's 0.4% negative. So driven by toys and electrical, as people were staying at home, there was purchasing that was happening in that space. So no issues for us in terms of general merchandising stock.Clothing started significantly negative. We ran a very successful sale towards the end of the first quarter, and so yes, whilst clothing is down 18%, it's a significant outperformance versus the market, in fact nearly a 20% outperformance versus the market. And results have been very good in terms of clearing any potential backstop. So as I sit here today, I'm really -- I feel very good about the stock provisioning and where we are in general merchandising and clothing.
Our next question comes from the line of Clive Black from Shore Capital.
Thanks for the Q&A and hopefully, you're looking forward to some nice lie-ins, Dave.
Three months yet.
Savoring the odd glass of beer in the evening. Couple of questions for me, if I may. Firstly, you indicate, with the bank on Figure 35, your expectations for the U.K. economy, which compared to February, are grim. How do you think this will pan out with respect to the nature of the grocery market in the U.K. as you see it? And then in relation to that I guess, how, with your Booker hat on, do you see the food and beverage market evolving? And to what extent could that be a structural boost, ongoing structural boost, Dave, to retailing? And then just finally from me, could -- I know it's a trading statement, but you have provided a lot of detail. Would it be possible for you to give us an indication of some of the cash flow dynamics within the business over recent times? You've talked about costs, but what about working capital within the grocery business? And maybe also fuel, given it was such an impediment at your results, please.
Let me start. Well look, why don't I talk about the grocery and the Booker, and I'll let Alan talk about cash flows and your last question? How's that?
Right.
Look, I think -- look, the assumptions that are in the bank come from an external body and the bank refers to them. But I think, look, depending which view you take, Clive, there is a view that things are going to get tighter as the -- from an economic point of view. The degree to which it gets tight is a matter of some debate. I think what I'd say to you from a grocery point of view is, if that were to happen, and we studied -- Alan and I studied previous recessions we came into Tesco. And actually, Tesco, historically, with only 1 notable exception, 2008, came out -- managed better in a recession by stepping in and helping its customers. Didn't do that in 2008. We won't make that mistake this time. So the desire for greater value, which is what customers want, is something that we absolutely listen to and completely reflect in the way that we run the business.And that's why you see that continuation of getting a basket in Tesco, which is the cheapest in the market, is a trend that we've been on, we'll carry on. We'll continue to expand that value proposition more and more broadly. As I said, I have a point of view that says it is better for us to be giving everyday great value rather than relying on promotional ups and downs. What actually people need in harder times is a consistent low price rather than an occasional low price. So we do have a point of view that it would be better for all the industry to be investing in lower prices rather than. But we'll see how that pans out. But at Tesco, we've got a point of view, we should lead, we should set our own agenda, and we've got a clear plan to do that. I think in terms of Booker, there were 2 -- I think there are 2 things I would say on Booker. Your structural boost to retail question, Clive, is clearly at the moment, we're seeing a lot of the calories that were consumed out-of-home, some of it transferring into retail. We still have different scenarios as to how much of that stays in retail, depending on how the lockdown is loosened. And actually, when customers feel that they either feel comfortable, feel safe, feel financially able to go back into the dining and the entertainment, hospitality space. But there will definitely be, I think, for a period of time, still some benefit in retail from the hospitality sector being more constrained because of the crisis. I think the other thing I would say about Booker is I do genuinely feel very positive about Booker's relative strategic position in that market. There was quite a lot of challenge, financial challenge for competitors to Booker going into this space. And so the inherent strength of Booker, but Booker now being part also of the Tesco Group, means that the offering and the financial wherewithal that Booker enjoys means that we have a very, very competitive offering. And that's why I say I see us exiting this crisis with market share significantly enhanced in Booker as we go through that change. So I'm really very positive about that, even though we've had to take the short-term hit of the catering business being locked down.Alan, do you want to talk about...
Yes. So Clive, in terms of working capital, the working capital position is very strong and arguably, it's never been stronger given the -- what we're seeing in the business and seeing the growth rates that we've experienced over the last quarter. But you're right, there are some elements in here. Fuel, in particular, is an area where there are 2 impacts at the moment on fuel. One is the drop in the volume of fuel we're selling. And the second one is the drop in the price at which fuel is being sold. And we saw fuel in the quarter hit very, very low levels here, multiyear low levels. So we'll just have to see how the volume comes back. And equally, the market price on that is something which we just have to absorb and it flows through. But given the size of that as a working capital element, it is something which can move it. And we are and will continue to work with our suppliers to make sure that we get the optimum terms there, and we've got very good relationships. And that leads into the other working capital point, Clive, is that as this crisis enveloped, we looked very, very specifically at our payment terms. We did support suppliers, particularly small, and even some medium suppliers. And that support was either because of the impact on their business, sometimes negative. But equally, as they saw volumes growing very, very significantly, they felt a working capital strain. And we supported them and we continue to do that. It's not a big callout in terms of quantum on our numbers, but really important in terms of our relationships with suppliers. This year is a particularly challenging year to predict working capital flows. And I'll just leave that out because as we get to the half year, we'll clearly have a position which we'll see. But underlying cash generation, very, very strong.
Yes, indeed. Okay, Clive?
Wonderful. And enjoy yourselves, Dave, and you're not too far behind in the queue either, Alan. You have a good final few months as well.
I think I've got 3 more interactions, and I'm looking forward to each and all of them.
There -- look, we're -- there are 3 months to go so you still got to suffer me for longer yet.
The next question comes from -- yes, that comes from the line of Alyssa Gammoudy from ING.
In terms of the shift from out-of-home to at-home consumption, to what extent do you expect increased competition from the food home delivery platforms like Deliveroo and Just Eat, I think are the main companies in the U.K. Can you, yes, tell a little bit more about that? And also, can you, yes, confirm that indeed in online consumption, online ordering, there is -- it's across all demographics, the increase is driven by all demographics?
Okay. Very good. So clearly, the options for customers to eat at home at the moment are provided by the businesses that you refer to. So they're clearly there. I think the -- look, we model going forward, different scenarios as to how much of that out-of-home becomes in-home. Our focus is -- we don't -- as you've seen from the growth already, so whilst there is a home delivery from those competitors, it's not having any impact on people's propensity to want to have grocery home shopping from Tesco. I think the opportunity for us as we go forward is how do we further enhance the offer. Because what customers tell us in research, which drives some of our scenario planning, is they like the convenience of some of the solutions you mentioned, but they worry sometimes about the health aspect. So we have done some work before about providing meal kits that people can actually prepare themselves. One of the things that's been really interesting is the growth in scratch cooking that's happened as people have stayed at home. And actually, we're in a unique position to be able to satisfy that. So there's definitely the competition you say there is there. But the other thing -- I don't know if you know this, but obviously Booker is a supplier of the foods to a number of the companies that you talked about. So we still have sales in there, whilst we have the grocery home shopping sales result. The online composition, yes, it's across all age groups, but it tends to be families. So it's not as pure demographic. It's more about families and family sizes, but we've seen all family sizes and all demographics respond to the announced offer in grocery home shopping.
The next question comes from the line of Victoria Petrova from Credit Suisse.
My first question is on your everyday-low-price comments. I totally understand that you want to be very well positioned into the potential economic downturn. But do you think that the super-high-demand environment, COVID suggests, is -- and extremely high costs you are seeing on your labor is the right time to invest in prices? Also looked at Kantar data. Maybe it's not fully indicative, but you're obviously winning market share over Aldi. But Lidl seems to be outperforming versus Tesco in the last month. Are you targeting Aldi specifically? And do you think that's what drives this discrepancy in performance? Or is there anything more specific there? That's my question number one. And my question two would be on your comments regarding online profitability. In April, you mentioned that online is dragging your profitability down, and this is quite a significant cost contributor. Has anything changed since April, given your extremely high like-for-like sales growth in online towards the second half or first quarter of around 48.5%? My very last third question is on your kits you just -- sorry about that. You just mentioned that you are looking at this area. And obviously, when I look at HelloFresh market cap, that should be a lucrative business, which is appreciated by investors. Are there any barriers of entry there or pretty much any retailer can enter this business?
Victoria, thank you very much. Look, I think when it comes to value and everyday low pricing, look, we think the thing that drives when you should be investing in prices is when customers need it most. And customers need it most. The time now is right. It's a continuation of a 6-year trend. It's not something new. The fact that we've had the growth that we have, the opportunity to come away from promotions because we've had that volume and to work with our suppliers in a way, which is to reinvest in everyday sharper prices for customers, we think is the right thing to do economically. We think it's exactly what our customers want. And it's the challenge that we take on. We've got ourselves into a financial position such that we are able to do that. I said at the results that we saw this year as a year to invest. Having recovered the profitability of the business, we are investing. Yes, some of the investment is slightly different to what we anticipated when we came in, but we continue to invest in value. And we do see, coming out of COVID, a once-in-a-lifetime opportunity to take -- to accelerate that trend in the way that I articulated. Your -- you made the point. We -- look, the reason that we picked Aldi is that, in the minds of customers when we set this, they were seen as being the price leader in the minds of customers. And therefore, that's the right place for Tesco to set as the benchmark. It also is very important, this is detail that might be important, is that in the way that U.K. advertising and marketing regulation works, in order to draw comparisons, you need to pick 1 to be able to justify all the claims that you make rather than a multiple, which makes that validation even harder on a daily sort of weekly basis. So that was the reason behind it. I think when you look at Aldi and Lidl over time, what you've also got to remember is their store-opening programs. So Lidl's store-opening programs are greater than Aldi's in this last period. And one of the things we do is we look at switching analysis ex new store openings, and you see very positive positions there. But if I'm not wrong, and I'm looking at Chris across the table, I think in the last Kantar, they reported a positive switching from Lidl as well. So whilst I pick out Aldi because it was the strategic intent, I think there's signs that we're gaining shoppers from both of the German retailers and indeed the discounters more broadly. In terms of online profitability, we've always been clear that it's dilutive. We've been on a journey over the last 5 years to take it from loss-making to be a positive contribution, but it was dilutive. We've always been clear about that. We had a plan and an approach of how we would improve that over time, so that we would get truly to be neutral from a profit point of view. Wherever anybody wanted to shop the Tesco network, we want that to be equal. It's fair to say that because of the crisis, we chose to invest so we probably made that more dilutive by opening up the capacity as quickly as we did. Again, I see that as an investment, what customers needed, particularly those vulnerable customers. So to invest in our brand and our business at a time of great need, we think is a very appropriate thing for us to do, and I continue to believe that the underlying economics of the online business will improve. I still think in the next 12 to 24 months, it will still be dilutive versus the average. But with UFCs, with productivity improvements and the opportunity around the delivery pricing, there's lots of things to improve. And I suppose the way of saying it is it's dilutive, but it's not dragging the profits down. That's why we've been clear that given all of this, we can keep retail profits broadly in line with last year. Meal kits. There is some interest. We've been doing this for a while. But the -- there aren't any barriers to entry. It's more about an operational change and it's always been for us about where does it sit in the pecking order of priorities, and we had done some other things first. So if that trend emerges post-COVID, then Tesco is in a very good position to be able to meet that demand. But there have been other bigger priorities given the crisis, that's all.
Victoria, if I can just build on the space question. And you all know this, but just to remind. If you put on 10% space 2 years ago, then you would expect, everything else being equal, to get at least 10% growth this year in terms of your Kantar numbers. Because last year, it's not in the like-for-like. 10% space 2 years ago becomes this year's like-for-like. So that's the way that I think in terms of the economics of a business and how intense that business is performing, how well it's performing. That's, I think, one of the important things to look at as that relativity measured by Kantar.
That's extremely helpful. And congratulations, Dave. It has been a great performance. I am relatively new to the stock. While initiating, I was amazed at the year-over-year development in Tesco since you joined. Thank you very much.
Thank you very much.
Our next question comes from the line of [ Dimitri Dimitriu from ASH Waters ].
I would like to start by also congratulating you, Dave, for your time at Tesco, sorry, and I think, some amazing performance during the last few years. I only have 2 very quick questions. So one of them on online on the point you just made. So can you -- are you implying bottom line is, at the moment, profitable as a stand-alone business?And my second question is on the guidance for flat operating retail profit for the current financial year. Just by looking at the margins of the business as they stand now, it looks to me that, that requires an assumption that the growth that you have seen in the first quarter would be more or less sustained throughout the year. Just simply by looking at the margins of the business, how much additional sales do you need throughout the year to make up for that GBP 840 million of one-off COVID-related costs? Is this an underlying assumption that you will see sustained growth throughout the year of a similar extent to Q1 in order to have a level operating profit? Or is there something else more specific there? Yes. That's my question.
Okay. I'll try and give more color and I'll ask Alan to help me as well. So let's start with online. Dimitri, just to sort of put into context a little bit of background just in case it's not familiar for everybody. Look, when we look at the online business and its profitability on a stand-alone basis and we charge it with an element of the fixed costs from the stores and the distribution center that supports the stores. And on that basis, we got it to where it was loss-making 6 years ago, we got it into positive territory. But we also look at it in a slightly different way, which is -- because the truth is, if I didn't have the online business in that store, I wouldn't save those fixed costs. So we look at it on a contribution basis as well. The cash contribution of the online business was getting to be really quite strong and positive as we went into the COVID crisis. And that was the continuation of where we were going, and we were being very disciplined about the way that we did that, and that's where UFCs and how we augment the offer going forward was planned over the next 3 years. At a time of great need, we used the capacity that we had to feed the country. And so we opened the capacity that we have in a very short order, and I was delighted with how well the business responded to that. Were there some short-term costs in doing that? Yes, there were. I talked about the number of people that we picked -- that we got to help us pick and drive. So there were short-term costs and there were costs also in terms of opening stores to pick from 2 a.m. in the morning rather than 6 and 7, which is where we were before. So that additional cost would have diluted the profitability of the business even more because we didn't change any delivery pricing. We didn't think that was the right thing to do, even though there was excess demand. You could have priced more. We didn't. We didn't think that was the right thing to do for customers at that time. And so we took a hit in terms of the profitability of online. I can see the improvements in productivity. I can see the improvements of that position as we go through the balance of this year, while still keeping the demand at 1.3 million, 1.4 million slots and above. So I'm comfortable with the underlying. It won't get to a place, as I said before, it doesn't get to a place where it's as profitable as the retail business in the forecast plan that I have. But it does get to itself -- to a place where it is a positive contribution. And I said before, it might be margin-dilutive, but it's not decaying overall profit. And now is the right time for us to invest in that business. And I'm really pleased that we did. Look, when we talk about guidance, if I start that off, what we're talking about is flat operating profit, right? So in a quantum term, we are -- we have made -- there's some help from business rates, but that comes each month in the way that you see in the appendix that we've said. But our costs are all front-weighted. So there's some offset from government, but the rest of it is an investment that we're making in doing the right thing for customers at this time. We're able to do that and keep our strategy and keep the profits flat and drive the growth that you're seeing. So there's no assumption that the growth stays the same in the second half as it has been in the first quarter. We have a view about how this will tail off. We'll see whether we're right or not. But it's not -- that assumption on profit, flat operating profit, is not predicated on sales rate staying at the level that you see in the trading statement. Alan, would you add anything to that?
Yes. Just to build on it, Dimitri. As we went through the turnaround, we felt it was helpful to -- for guidance and the way that we are thinking about the business to talk about margin and the margin range. And this, remember, is a margin which was pre-IFRS 16, is actually what we originally spoke about. But as we then exited, and we were very clear and remain of the view that actually, what we're really interested in is the way the business is performing and the cash profit we're generating from it. So in that sense, we're looking at the cash profit we're generating, which is, of course, a function of the margin -- the commercial margin and the cost of running the business. But looking ahead, as we take in all of the moving parts this year, the best view we have as we look to the year-end is that, that retail operating profit will be flat year-on-year. But we're not particularly focused on sales and what that means for margin as we think about it. Okay?
Okay. That's extremely helpful.
And the last question for this morning comes from the line of Nick Coulter from Citi.
Dave and Alan, best wishes to you both. Three quick ones, if I may as I'm the bookend of the Q&A queue. Firstly, just to clarify on Booker's catering performance, excluding Best Food. Statistically saying that existing customers are very understandably buying less, but you're seeing an influx of new customers. And I guess the figures seem to suggest that this is happening already given the outperformance in lockdown. And then secondly, if you could quickly update on Asia, please. I think implicitly, everything seems to be on track, but it would be great to get that reassurance.And then lastly, it would be rude not to have the last question of the call on online. But would it be possible to get a sense of the split between pickup and delivery in P3 when you're running at this new enlarged capacity, if possible, please?
Okay. Nick, I'll give you my assurance on Asia, but I'll let Alan talk to that specifically. Look, in terms of Booker, in terms of catering, you're right at the outperformance. I think what you've got -- and if you look in the appendix, the helpful thing that we tried to show, you see I gave some breakdown -- we gave some breakdown of Booker. And what actually, Nick, is really happening is different sectors of catering are opening up at different paces. So be that, what's called here cost catering, which is some of the facilities that we serve, they've obviously not changed very much. So we've been able to keep that business. So the fact -- as you know, Booker services prisons and things such as that and government institutions. That stayed pretty flat during the period. And it's really about the mix, whereas pubs and restaurants have been much more tightly locked down. We've seen in our fast food, and this is where having Best Food as customers has actually been helpful because actually, these are the places that have been opening up and Charles and the team have been very active with them in terms of trying to support. I think the thing that is, meaning, why are we winning new customers? And this comes back to the financial strength as well as the capability within Booker is, in this sector, working capital is crucial. And the idea about how do you open up and buy working capital in food, wholesale, when the demand is uncertain and not at all sure about how that will open up, we're able, as a group, to be able to support that working capital expansion, probably better than most. And that's helpful for people who are starting to open up their businesses earlier than some. So that's why I say very confidently. I'm very confident that Booker will come out of this crisis in foodservice in a significantly stronger relative position than it went in. But the makeup of the numbers, Nick, is a little bit more in the detail of sector by sector than might otherwise have been apparent. Asia is on track and good, but I'll let Alan talk about that. And honestly, I don't have the P3 split of click and collect versus online, but I can go away and get it and get one of the IR team to share it with you. It's predominantly delivery. Click and collect is important. And it's expanded rapidly as well as we've gone through this. Actually, there are a group of people fit to drive through our car parks and pickup has been very helpful. And so we continue to expand that. And we've done -- but I honestly don't -- I just don't have the split in my head, Nick, so I'm not going to make up a number. I'll let Chris or Sarah to give you a call with that after this call, if that's okay. Do you want to say [indiscernible]?
In terms of Asia, it's absolutely on track. There were essentially 2 conditions that we needed to bring. One was the shareholder approval, shareholders overwhelmingly approved that back in May. And we are absolutely on track for the competition clearance, which is the second element. And -- but that's both as regards to Malaysia, much smaller, but also Thailand. Once we have those approvals, we then go back to shareholders with the capital distribution. And then in case anybody's questioning, absolutely no change to the pension fund either in terms of GBP 2.5 billion we're paying in with that. And that process of formality with the trustees is no change and on track. And finally, this allows me also just to talk about Poland, which also is expected to go through competition clearance and close in the second half of the year.
Gino, I'm told there's one more question. Is that right?
Apologies, sir. We have 1 final question on the line. That comes from the line of Sreedhar Mahamkali from UBS.
Sorry, I think that I've had a technical issue there. Dave, again, I echo what everyone else has said, repeating congratulations for all the great work and really wishing you well for the future. So thank you. Two key -- I guess, two questions, key ones for me anyway. Firstly, thank you on the update COVID-19 cost scenario. But do you have any thoughts now in terms of the shape of sales that you were thinking about? I think in April, you were talking about scenarios, all of which actually pointed to pretty sharp growth I think from week 14 onwards. Actually I'm looking at the charts here. Does that still feel right? And how should you -- how should we be thinking about it? That's the first one. Second one, you've referred a few times to the switching gains from Aldi and Lidl and discounters in general. And clearly, I think from externally, what we see, the drivers are being online and larger stores with the perception of better social distancing implementation and safety. But with Clubcard data, are you able to identify who these are, what else they value in Tesco? And what gives you confidence you can actually retain them once social distancing actually eases and people just fall back into the type of regular customer behavior, as in they go back to Aldi and Lidl? Those 2 will be the key questions for me.
Okay. Thank you, Sreedhar. So I think in terms of COVID costs, the costs look pretty clear, and you can see the assumptions we've made about timing. It falls between scenario 2 and 3 that we had before in terms of the cost profile. And that's why we've updated as best we have them to just over GBP 800 million. In terms of the shape of sales, we continue to run different scenarios, Sreedhar. And look, there are 3 things that -- because I'm not going to give you a shape of sales. I've got a number of different scenarios, but I will tell you what's driving the assumption. The first is what is the state and the level of opening of the hospitality sector and what is the adoption of that by customers when they come. It's one thing for restaurants to be open again. We still have a view as to -- we have different views as to how quickly people will readopt that habit based either because of a concern on COVID or concern sort of financially. So we've got different scenarios for hospitality and how much of that out-of-home demand stays in the retail model. We have -- I think I shared last time, we were modeling how many people would stay at home for holidays and what that would mean in terms of a potential impact. I think it's pretty clear that there will be more staycation in the U.K. But as holidays opened internationally last week, there was a jump in people. So that is a variability. It's not insignificant. But I don't know exactly what that will pan out, but we've got different scenarios. And then obviously, there's the question that everybody has, which is were there to be a recession after our furlough stops in October, what impact would that have? So we put all of those 3 together. I'm very comfortable that we're competitive against the market as we go forward. That's why I focus so much on the value equation, but also the range and the service that we're providing. That's key. And so we'll be relatively strong. But I haven't going to shape of sales for you. I can just tell you what it is, we're modeling as we go through that. Look, when you talk about the discounter gains, I think the truth of it is, yes, online, also convenience have been important, but so has the fundamental core offer in the store. Never has it been more important to people to be able to go to 1 shop and get everything they need and have that safely and at good value. And that's why we've chosen to invest disproportionately in this time to make sure that, that's what they get. Sreedhar, you've heard me talk before that the turnaround of Tesco has been all about taking away reasons why anybody needs to shop anywhere else. We have penetration and reach as competitive advantages. We lost people. We lost some of their visits and their frequency and their basket size because they felt they could get something better elsewhere 5, 6 years ago. And we take it -- every time we've taken away a reason for them to do that, we've grown our business. So now this is where Aldi Price Match as a thought, is so important. So if I can get 500 of the most important lines in Tesco at the same price or better than what people historically thought was the price leader and at Tesco quality in a shop which is safe and they get all the range, that's the reason we think, and that's how we want to try. Now as we drive into the second part of loyalty, we built some models that allow us to reward loyalty in a unique and differentiated way. And you saw some of that in Clubcard Plus, not the time to sell subscription at the minute, but the mechanic works really very well. So that's a piece of ammunition that we can bring back to the piece. And you'll see other things from us in terms of rewarding loyalty so that we can keep people who are attracted by that fundamental core offer of great value, great quality, great service and a safe shopping environment because that is crucially important.
Just coming back on the sales and costs. Should sales remain meaningfully elevated, not necessarily as strong as we've seen in Q1, do you see costs continuing to rise through the second half of the year? Or do you think costs are pretty well-calibrated and any additional sales is probably going to be giving you more leverage?
Well Sreedhar, I think there's a level of precision there that I think we would all -- we've given you -- what we tried to do is give you the costs as we understand them by quarter. And that's based on the assumption of a gradual easing off. If there were to be any change, then we'd have to change the assumptions. I'm really happy that with these costs, we can continue to invest in the business and keep the profitability of the retail business flat. If there were -- I'm very confident that we can do that whatever the situation is, but I can't, with any accuracy, talk about what the cost profile will be other than the quite large degree of detail that we've provided in Figure 31.
No questions over the phone line. Please continue.
Thank you very much. Ladies and gents, thank you very much. As I said, it is my last trading update. Over the next 3 months, we'll ramp up my handover to Ken. He starts on the 1st of October. So he'll be in, in the seat when you come together on the 7th of October. I just wanted to say thank you, if I may, first and foremost, to my Tesco colleagues. You know that when I joined, I didn't have a retail background. They have been unbelievably welcoming to me. They've been very generous in the way that they've shared their expertise with me. And it has been and continues to be a privilege to be part of such an amazing team, and they have my 100% commitment until the very last day of September. But I'd also like to say thank you to you, for your questions, for your challenge, for your support. I don't think you realize how much of an integral part of the turnaround journey you have been. And I'm sorry that I won't get the chance to say thank you in person to you as a group. I hope our paths do cross again, but it would be remiss of me not to say a heartfelt thank you to you for all of that challenge and support. Stay safe, stay well, and thank you very much indeed.
Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect. Have a good day, everyone, and stay safe.
Thank you very much.