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Tesco PLC
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Welcome to the Tesco Q3 and Christmas Results Analyst Call. [Operator Instructions] Just to remind you, this conference is being recorded. I'll now hand the floor to our host, Dave Lewis, CEO. Please begin.
Mark, thank you very much. Good morning, everybody, and a very happy New Year to you all. Joining me on this call this morning, as usual, is Alan Stewart. And because, after 6 Christmases, I know that virtually all the questions will be about U.K. Christmas trading, I've asked Jason Tarry to join us on the call as well. And I also know it's a busy morning today, so I'll quickly share a few reflections on our performance and then open it up to your questions.The U.K. retail environment is clearly subdued at the moment, and growth isn't easy to win. So against that backdrop, I'm particularly pleased that we've outperformed the market and delivered our fifth consecutive Christmas good growth. I think that's particularly noteworthy given our very strong performance last year. We achieved this through an extremely competitive product offer, a very compelling customer proposition and a really strong operational performance from our stores and distribution network. In terms of value, the cost of a typical basket of 21 important Christmas products was GBP 2.28 cheaper than last year in the weeks leading up to Christmas. And on top of that investment, we had strong deals from our Festive 5 veg to half-priced beef and lamb joints. We also strengthened our ranges, introducing 240 new or improved festive products including a notable increase in our range of plant-based foods. Over the last year, we've expanded our range of plant-based foods by more than 2/3 with another 68 new lines launched just this week.The investment we made in our offer was reinforced by a really strong Christmas marketing campaign which built on our centenary campaign of 100 years of great value and drove further improvements in quality and value perceptions. In November, we also launched Clubcard Plus, and the response has been very positive, helping customers to get even more value from their Tesco shop, so a really strong offer and a clear proposition for customers. Underpinning all of that was a fantastic operational execution by Jason and the U.K. channels team; in fact, the best operational performance I've seen in my time here. Every part of the operation works in harmony throughout the Christmas period from the supply chain to distribution to stores. Availability was the highest in the last 6 years, and customer satisfaction with the shopping trip improved further, in particular for ratings of ease of shop and colleague helpfulness. The combination of a compelling offer delivered brilliantly well helped us to outperform the market even against the challenging backdrop. Now to try and put that performance into context, on the 23rd of December, we sold more food than in any other day in our history. And at our peak between 12 noon and 1:00 p.m., we served 890,000 customers in just 1 hour. And in our online business, over the 19 weeks, we delivered more than 14 million orders.Now if I step back and look across the full 19-week period, Booker continued to deliver strong growth in a subdued market and was also named Best National Wholesaler in November. Our acquisition of the assets of Best Food Logistics is on track, and we anticipate completion in early March.In Ireland, our price campaign as well as the particularly strong contribution from our online business helped to drive positive growth. And in Central Europe, Matt and the team continue to drive a very significant transformation program. This has caused some self-imposed disruption with a particularly significant impact in Poland from our transition to a 2-format model. To illustrate that, in our biggest stores, we've taken out half of the floor space; and in our compact hypers, we've reduced the range from more than 40,000 SKUs to just over 10,000. Excluding Poland, sales declined by 3.7% over the 19 weeks. 3% of that impact is due to a combination of the closures, the rightsizing of large stores and improvement to the product mix. We continue to strengthen our offer for customers, including improving availability and a more compelling seasonal product offer.Turning to Asia, growth in fresh food was particularly strong, and customers are responding well to our new convenience proposition. Total sales were level as we continue to optimize the mix of our product ranges and focus on sustainable profitable ranges, with a 13% reduction in general merchandising sales having an impact of around minus 1.4% on overall performance. We announced last month a strategic review of our operations in Thailand and Malaysia. And as we said in the release, no decisions have been taken. I don't have anything new to add today, and a further announcement will be made if and when appropriate. So across the group, it's been an incredibly busy period, and I'm very grateful for every colleague for their contribution. I've never seen the U.K. business running better than it was this Christmas, and that's a huge credit to the whole team. We have the right plans, we executed them well, and that's reflected in the growth we've delivered in a subdued market.Thank you for listening. And with that, I'll hand you back to Mark and take your questions.
[Operator Instructions] Our first question comes from the line of Bruno Monteyne from Bernstein.
My first question is on the Christmas like-for-like clearly seems a step-up versus quarter 3, and that's actually the opposite of what the market was doing if we believe Kantar. So a few questions. Where do you attribute that relative step-up versus the market over Christmas? Is that Clubcard Plus? Anything else? And is that also a good indicator of the exit rate for the next quarter or the next few months? Second one, can you say a bit more about Tesco Plus? Actually a bit short on number, I thought, in the release. How many people are signing up? What kind of impact would it have on like-for-like already? And last but not least, just looking at all these data points, Kantar has 0.2% growth in the entire U.K. Call that almost nothing. A lot more announcements about promotions even at the hard discounters and price cuts of competitors. Is the U.K. getting materially worse in the last 6 months versus what it's been in previous years, or is it the usual humdrum of trading plans and announcements?
Okay. Bruno, why don't I try -- I'll start and then I'll ask Jason to give some color, if I may.Look, I think first and foremost, the quality of the U.K. operation was significant. The availability I talked about was outstanding, all right? So the quality of the offer that we put together was outstanding. Our value was very good. And what you saw in terms of customer service was also really very good. So I think that plus the investments in value that we made have really driven the performance in the U.K. When you talk about Clubcard Plus, look, it's 8 weeks in, really very happy with the way that it started. It's not material -- it's not having a material impact on the results today. So I think there'll be more to say about that in the fullness of time, but I'm happy with the way that it started. It is having the impact in terms of increasing the size of the basket that we want. But we won't call it too early, as I say we're only 8 weeks in.Look, on your point about Kantar, look, we've always said it's a data point. It has some relevance, but it's not an exact replica of how we see the market or how we measure the business. And I suppose the numbers today sort of illustrate that yet again. I think the only thing that I would pick out at what you've said before I hand it over to Jason is, look, promotion, I've seen the commentary around promotions. Look, it always steps up a little bit in the Christmas period. If you look at Tesco promotional activity this Christmas versus last year, it's ever so slightly down. Others of our competitors have stepped up compared to last year. We haven't. We're about the same. And our performance has been relatively very strong especially when you think about the strong base of last year. So that's the sort of sentiment I would give you. But Jason, is there anything more you want to add to that?
Look, Bruno, you talked about Q3 into Christmas. I mean all I can say here is we had a plan for the whole quarter, as you know and would expect us to have, and we executed against that plan. And we're not distracted. And I think that was -- that's one of the sort of key drivers of making sure that we focus on doing the right things at the right time. I mean in terms of the promotions, I think we -- for a number of years now, we've looked to offering real choice in our offer both in terms of our prices and also our promotions across all of the key areas. And that was no different this year. And we saw customers react to that very well. And in the round and sort of walked in our shops versus others, I felt overall we had a very strong offer relative to across all of the product areas, whether that be produce meat, nonfood, booze, confectionery, et cetera.
You did see a relative improvement in market performance in Christmas versus the pre-Christmas period. That's fair enough. Your relative position was getting a bit stronger?
Indeed. Well, as I think the numbers show in U.K. core from like-for-like 0.4 negative to 0.1 positive, that's the step-up that you see, so there's a relative difference. It comes with the shape of the plan, as Jason said, but yes, your assumption is right, Bruno.
Our next question comes from the line of Rob Joyce at Goldman Sachs.
Just a couple from me. No real mention in the release -- it's a sales release, but no mention on profitability or consensus, I think. I just wondered if you could make a comment on how you see that EBIT consensus for FY '20. That would be very helpful. And the second one, as you talk of the GBP 2.28 reduction in your prices over the period, I mean 2 questions there. Are you now starting to see almost deflation in the basket? And the second one is could you just give us an idea of how that relative price gap has narrowed or widened versus was it competitor A and competitor L.
Okay. Well, look, it's a sales call, so we won't talk about consensus, but I'll pass it to Alan if he wants to give you any further detail.Look, in terms of the -- what would I say, about the GBP 2.28, that was the basket of the most important items at Christmastime. We can give you the details if you're interested. I think that basket that you talked about, we checked it on the -- and that was the Jack's basket, if you remember, the e-basket. We checked it on the 2nd of January, it's the last number I saw, and we were still cheaper than A and L. We haven't seen deflation. I think Kantar put the number at 0.8, and we were significantly below that, but it wasn't deflation. Alan, do you want to say anything to help Rob with it, EBIT consensus?
Yes. In terms of -- it is a sales call. In terms of consensus, we've got nothing really to add. But the one thing I would say is that I think we're in a really good position from a customer perspective. We've always said that's where we want to be. If you've been in store this week, you'll have seen some new offers coming in. And we're now in a really good position to be able to do that. But consensus, nothing to add.
As Alan said, we're continuing to invest through the balance of the year.
Next question comes from the line of Andrew Gwynn at Exane.
Two questions from me. Just on Europe, I mean obviously, it's quite a big miss versus the consensus number, but I'm just wondering to what extent did it differ to your own internal plans. And then sort of connected to that, how should we think about that number going forward? Because clearly, we're all having a bit of difficulty modeling it. That's sort of question one, albeit I appreciate that's 2.Then second one is just on Booker. We had a strong performance in Q3, and then it tapered somewhat into Christmas. So I'm just wondering what that differential was and which is a sort of more reliable number to extrapolate going forward.
Okay. Well, look, on Europe, obviously, we know the plans that we've got. It's all of the changes in Europe that's self-inflicted. It is a change program. It's always difficult to forecast exactly how the business will respond as you make such significant changes. But I'm happy with the progress that we're making. We'll continue with that transformation. We're about half of the way through where we wanted to be particularly in terms of what we want in Poland. Is it significant in terms of our plans, against our own internal plans? No, it's not. So as I say, self-imposed, self-inflicted, it's a change that we want to do, and we're happy with the progress that we're making. I would be very clear that you always have some fluctuations and volatility as you go through that change, but that's retail. In terms of Booker, I'm actually really very happy with the Booker performance. I think if I look at ex tobacco, Christmas trading is 3.8% growth. So actually, it's a small step-down versus the 5% you saw if you go back in terms of the like-for-like but not significant. Christmas is not the biggest period for Booker. But now actually, I'm in -- again, in a challenging market, I'm pleased with the Booker performance.
And Andrew, if I could just add a little bit to the CE comment and in terms of the change, as Dave says, we're halfway through it. We really started this change towards the end of the first half of last year. So this is the year of very significant transition in terms of the business. And that's what we're seeing. In terms of the overall performance through the region, we will continue to see that in the first half of next year because it's only towards the end of the first half that we begin to annualize against those changes. So I just want you -- in terms of significant change happening in stores this year, but the impact of that will move into next year as well from a sales number perspective.
So just to clarify on that, we should model a like-for-like loosely as negative into the rest of Q4, Q1, Q2 next year?
Well, Andrew, we're going to have to leave the modeling to you. We don't model like-for-like for ourselves, so I'm afraid I can't help you with that in that sense, I'm afraid. All we can tell you is this: We're halfway through the transition. We'll see that in the sales line as we complete it.
Our next question comes from the line of Clive Black at Shore Capital.
A couple of questions from me. Firstly, can you give us an indication of the format performance of your U.K. business particularly noting your comments, Dave, about Clubcard Plus and basket size? And secondly, any indication of the time expectation around the Best Food Logistics deal?
Well, I'll take the second one, and I'll ask Jason to give you any insight in terms of formats, if that's okay, Clive. I said in the release, we anticipate it being completed early in March, the Best Food Logistics transaction. So that's the assumption that we're working to. Jason, do you want to say something in terms of formats' performance?
Yes. Look, we were strong in -- across all of our formats, to be fair, Clive. So online was ahead. And the other formats are pretty much in line with where we expected it, to be fair. And as Dave talked about before, Clubcard Plus, it's far too early to have any sort of a material impact on that. So as you know, the mix works differently across the cycle. So particularly strong on large stores in the lead up to Christmas, and then you end up with our smaller stores really kicking in as we get to Christmas Eve and beyond.
But I guess just in that respect, you didn't -- I mean Dave is quite right to sort of qualify the recent nature of Clubcard Plus. But you didn't see any -- in terms of the effect it did have, you didn't see anything coming through, for example, in large baskets and trolleys in, say, Extra stores.
Now Clive, I think what we should say is that 8 weeks in, what we definitely saw was we saw that the basket size of those people that were subscribers started to increase. We're not yet at a place where we want to reveal or issue because it's way too early. But are we happy of the way it was being used by customers who've sign up with the way that we had designed it and thought might be helpful? The early signs are that, that seems to be working as we thought it might.
Okay. And then just -- sorry, guys, just one last thought on -- following Andrew's questions about Europe, can you give us an indication just how food performed in Central Europe for us, please.
Yes. Food was much, much stronger. So as I said in terms of the -- we continue to trim the range on general merchandising. So fresh food was, I believe, just positive. So food continues to perform very well as we change the mix in stores, Clive. But you've got to be honest, the amount of disruption that we're talking about when you halve the shelves -- the floor space, is significant. So all categories are affected as you take a store through that level of transition.
Our next question comes from the line of Andrew Porteous at HSBC.
A few from me, if I may. But if I could just talk about sort of some of the inflationary pressures you're seeing, I mean obviously, there's been a bit of talk about inflation coming out of the systems. Sterling has obviously been quite choppy. Can you perhaps give us an update on what you're sort of seeing from the supply chain about cost pressures now and perhaps going forward as well? Second question was around Booker. I think actually the 3.8% seems quite pleasing. Could you give a sort of split between where the catering and independent retail side of things looks? Because it seems like the independent retail channel had a particularly sort of tough period from that perspective. And lastly, can you give us an idea on sort of mix? And did you see people trading up as expected over Christmas? I mean clearly, the industry didn't have a great Christmas. I'm just wondering whether you saw sort of normal patterns of trading up or whether that was a little bit subdued.
Okay. Well, again, why don't I start, and then I'll look to my colleagues if they want to add something to this, Andrew. So inflationary pressure, they're definitely there. They continue to be there, and they're across a number of different commodities. I wouldn't call out anything particularly unusual at this point. I'd just reiterate the fact that what we try and do is we try as best we can to mitigate all of that pressure for our customers. That's an approach that's worked for us over the last 5 years, and we'll continue to do that. I think the critical thing, we don't provide Booker split in this trading update. We'll give you more detail when we get to the full year. Actually, I was pretty pleased with -- but what I would say is I was pretty pleased with the Booker performance both in terms of independent retail and indeed in terms of catering food service. But we'll give you that split when we get to the full year as normal. And in terms of mix, we saw pretty much the usual elements of mix. Finest did better. There were some particular categories where Finest did better, but Finest always does better at Christmas. So the balance, I think what Jason would -- I'll pass him over -- pass you over to him, but actually what we liked best was the balance of what we had across the piece. But Jason, do you want to add anything to what I've just said?
Yes. Yes, look, I think that what we generally saw was customers actually making their own choice on value throughout our offer, really. So we saw customers buying into Exclusively at Tesco, but we also saw them buying into Finest in a bigger way. And we saw some really strong performances there. We sold out Finest gammon. Finest Prosecco was really strong for us because it won Which? Best Buy. Turkeys, crowns, very strong; and some really good retail of festive food ordering. But we also saw in booze, in spirits a real sort of buying into more of the premium brands. So we did see that. But we basically saw customers making choices throughout the shop and where they can see the price and quality and mix that suited them. But we definitely see some opportunities for next year as well particularly in the Finest space even though it outperformed the business.
Andrew, is that helpful?
Yes, really helpful.
Our next question comes from the line of Xavier Le Mené of Bank of America Securities.
Two -- one quick question, you are commenting actually your outperformance that you saw for the past 5 weeks actually heading to Christmas. So would you say the same comment in terms of volumes, value, outperformance for Q3 and the whole period? And if you see a bit of change there, would you say that you were particularly more prepared for Christmas than you were in Q3, or you will see no change there?
Xavier, I think what I would say is if I look at -- so if we look at IRI, which is what we'd use in terms of looking at market outperformance, in Q3, we were -- food was 0.1% outperformance, and that was stronger in the Christmas period. But both in value and in volume, we were slightly -- we were about where the market but slightly positive in Q3 but stronger at Christmas. Jason, anything else you want to add to that?
Nothing. You've covered it, Dave.
Right.
And would you say that -- why do you have this change actually? You said slightly above in Q3, better in Q4. So is it because you were prepared for -- actually Christmas, sorry, better than you were in Q3? Or is there any read across here?
No, I don't think so. I think it's about phasing and timing of plans. We -- as part of our centenary offer, we ran a different promotional plan through the course of this year in terms of the centenary event, so that has an impact in terms of how Q3 played out. There were definitely some impacts in Q3 from mix, but they were in the market as well. So I think it's not that we did anything particularly different at Christmas. As you know, Christmas last year was particularly strong for us. But as I tried to say in the notes, and I'm saying this so because -- to spare Jason's blushes. The operational performance of our business in the U.K. in the run up to Christmas and during Christmas was fantastic. And that, together with a very strong value proposition, a compelling advertising campaign, led to the outperformance that we've talked about.
If I may add, it's a real example -- we've talked before about not being obsessed with like-for-like. We looked at the calendar from a customer perspective across Q3 and into Q4, and we created our trading and operational plan accordingly in order to make sure that we have the most relevant offer at the most relevant time for customers. And I think that's what you saw in the numbers, to be fair.
Spot on.
Our next question comes from the line of Nick Coulter at Citi.
Three quick ones, if I may. Firstly, could I ask about your GHS order growth across the period and how you balanced that with the quality of the customer acquisition? Then secondly, on the Booker acquisition that's just coming through, just to check, should we expect all of the GBP 1 billion sales support across, or might there be some natural churn as it changes hands? And then lastly on Europe, please, can I ask about the performance of the new lower-range, compact hyper format? It's obviously very early days but presumably you ran some trials on that new format.
We did -- thank you, Nick. In terms of Grocery Home Shopping, 14 million orders over 19 weeks, really very strong. Obviously, it's a very strong period for us anyway in terms of Grocery Home Shopping. The thing that was really interesting is basket size continued to improve, and we were very keen that we invested in. We weren't chasing growth through aggressive couponing. We didn't feel that we needed to do that. The customer experience was fantastic. So our NPS score on Grocery Home Shopping during Christmas grew by more than 5 points, which is a phenomenal performance. So it's a very good quality of execution in Grocery Home Shopping. In Booker, the Best Food Logistics deal is sales of GBP 1.1 billion. There are 4 very large customers that make up a large part of that. As we've gone through this, we have spoken to all of those. We anticipate all of those sales coming with the deal when it's concluded into March. And Nick, I think you answered your own question on Europe. It is too early to tell. And obviously, Christmas is a very particular period on which to judge any change. What I can tell you is availability, customer feedback was strong in those stores that we've done, but we're sort of halfway through those transitions. So we've got an awful lot more to do, but it's self-imposed, it's controlled by us, and it's eminently manageable in the context of the total plan for the total group.
Can I just come back on GHS? Is it fair to say that there was a lower contribution to sales this period than in previous periods? Or how should we think about that?
Yes. No. It is fair to say because, look, it's always been very high at Christmas. And we -- in the first half of this year, I think the growth was around 7%. It was slightly lower than that in Q3. Christmastime, where it's already a very well-demanded service, and we focus on basket size, and we focus on the service delivery, and that worked really very well. Alan, do you want to add something?
Yes. Nick, I think absolutely just building on that, the flip side of it is if you look at our overall performance, it shows the strength of the large stores and particularly the Extra and how they are delivering that full customer offer because the rate of growth across the 19 weeks in our online business was lower than we've seen in the half year when I spoke about it. So really given the overall [indiscernible] and the overall performance, really strength to the Extra format.
Okay, Nick. And then the other thing I'd add is -- and you would have read it in the release as well. So just to add to Alan's point, the fact that we've got a 0.4 drag from GM in the period is also showing that the Extras are performing in food really very well. And that's where my example from the 23rd of December comes in.
And our next question comes from the line of Alyssa Gammoudy of ING.
Just to be sure and perhaps I missed it, but the performance in Central Europe, it's purely driven by operational? Or is it also the market which is deteriorating?
No, it's -- the market was quite soft in a number of categories. But by far and away the most significant issue is the self-imposed transformation. The downsizing of stores, the changes to the operation, it was much more driven by our own activity than I could attribute to the market.
Our next question comes from the line of Maria-Laura Adurno of Morgan Stanley.
So just very 2 quick questions from me. So with respect to the U.K. and the impact that you mentioned coming through from general merchandise and how you're working on the offer, just wondering when we should expect you to complete that refinement in the offer. And maybe on an underlying basis, some thoughts around like what is it that you're actually doing. And second question is more around wholesale and maybe if you have comments around the competitive environment and where you stand from a pricing standpoint there.
Okay. Maria, look, I think -- again, I'll start and I'll let Jason add something if he wants to. I think -- look, I think that we'll always be adjusting. I think one of the things we've been very keen that we do at Tesco and thinking about the mix of products we sell is that we keep it constantly under review. But habits change, and we should move. And if profitability profiles change, then we should adjust the space in the priority that we give. So I suppose what I would say is whilst the big majority of what we had to do in terms of unprofitable general merchandising has been done, I would look to Jason and indeed the other 3 CEOs to constantly actively be managing mix. So I don't think there is a point where I will say to you this is all done and it's over. I want them to be constantly thinking about mix. In terms of wholesale, look, the competitive environment is tough. I think it comes back to the subdued market. When it comes to pricing, what Charles and the team do every day and every week is they look at the price indices versus key competitors. And we've managed to keep our price indices consistent through Q3 and Q4. So yes, it's tough. We continue to be price competitive. There isn't anything that I could particularly point to you that was different in this period versus any other period that we've reported on.
I don't have anything much to add in general merchandise mix apart from the fact that we still see plenty of opportunity going forward in terms of product mix and space.
Yes, agreed.
Is that okay, Maria?
Thank you very much. Thank you.
Thank you.
[Operator Instructions] Okay. There seems to be no further questions coming through at this point, so I'll hand back to Dave for the closing comments.
Thank you very much, Mark. And as I said earlier, I'm really very pleased with the way that we ran the business this Christmas. And every element of the operation played its part in delivering a fantastic offer for customers. With that, I wish you again a very happy New Year. Thank you for joining us, and I look forward to seeing you at the full results in April. Thank you very much.
This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.