Related
news
Shares Magazine
There’s little doubt about Tesco’s position in the UK grocery sector. It dominates in a way which is beginning to match the high watermark of the 2000s when its share of the market was above 30%. The share price too has surged in recent years to approach levels last seen in the late noughties and early 2010s.
But what is behind Tesco’s competitive strengths and what can the business do to sustain them in the future?
Understanding Tesco as a business
Most people reading this will be very familiar with Tesco, you may even shop there, but it is still worth taking a moment to go through all elements of the business in detail. Its retail business generates the lion’s share of revenue with 3,724 stores across the UK, Ireland, Czech Republic, Hungary and Slovakia. This part of the group operates across a range of formats, including online, large and convenience stores, selling food and groceries as well as clothes and homewares under its F&F brand. Its Tesco Marketplace platform, launched in 2024, sells a range of third-party products.
Leading UK food and drink wholesaler Booker is the next largest contributor to revenue, serving caterers, independent retailers and other customers. One Stop is a retail convenience business with more than 1,000 company and franchise stores across the UK.
Tesco Mobile has some 5.5 million UK customers and has nearly 600 phone shops across the different countries in which it operates. Plus, while it sold its banking operations to Barclays in 2024, Tesco still offers insurance and money services while operating the third largest ATM network in the UK.
What might surprise people more is that this humble grocer also owns an analytics business – dunnhumby. This outfit uses AI to parse customer data and deliver insights which can drive loyalty – not just in Tesco’s own business but for third parties too. While its contribution is modest in the context of the wider group, it still generates hundreds of millions of pounds in revenue.
Using data to drive customer loyalty
Tesco was an early adopter in this sphere thanks to the launch of Clubcard in 1995. More recently this loyalty scheme has been used to offer discounted prices to members, with a relaunch in June 2026 allowing 16- and 17-year-olds to take advantage of its benefits. A recent probe by UK competition authorities into loyalty card schemes put Tesco and others in the clear as it confirmed the loyalty prices offered did provide genuine savings.
Clubcard prices and the personalised and targeted offers served up by Tesco using its customer data have been a powerful tool in driving repeat business and lifting its market share to the current 28.7%. These advantages and the company’s huge scale, which conveys enviable buying power and allows it to keep a lid on prices, have also helped it to see off the challenge posed by the German discounters which have had a more damaging impact on the likes of Morrisons and Asda.
Supermarkets typically operate with razor thin margins, though they do benefit from typically taking cash from customers for products before they pay suppliers, and Tesco’s latest trading statement for the first quarter of its current financial year created some concerns and saw the shares slip back.
One area of worry was that profitability could be squeezed as it expands its Aldi Price Match scheme to Tesco Express stores. A continued weak showing for Booker, which reflected a tough catering market, was another negative.
CEO Ken Murphy was also conservative in his commentary on the outlook which accompanied the update.
Undoubtedly, a difficult consumer backdrop is a challenge for Tesco, particularly if there is a significant spike in food prices thanks to the disruption from the Middle East conflict, but ultimately demand should prove resilient given a weekly shop is a non-negotiable for most households.
A more structural risk to consider is the proliferation of weight-loss drugs and the impact this might have on shoppers’ figurative and literal appetites. Though some observers, notably seasoned retail sector analyst, Shore Capital’s Clive Black, believe there are opportunities for Tesco here. Black notes there is a ‘notable fresh food opportunity’, and adds: ‘Overall, our gut feel, no pun intended, is that such drugs are positive for Tesco.’
How can Tesco grow earnings and how is it valued by the market?
Earnings growth has two obvious drivers, assuming Tesco doesn’t pursue a significant international expansion, having largely failed with previous efforts in Asia and the US.
One is to continue leveraging its scale. This can help to drive down prices, thereby further strengthening its competitive position, and boost margins as costs rise less quickly than volumes. The other is to use its strong cash generation to buy back shares. When you add in growth in the dividend there is potential to generate attractive total returns for shareholders.
The company’s valuation on a price to earnings (PE) basis is some way in excess of its sole remaining point of comparison on the UK market: Sainsbury’s which it has comfortably outmatched on the stock market for a long period.
However, it does trail a long way behind US retail giant Walmart in terms of forecast PE. The size of the latter’s e-commerce operations, its presence in a US market which enjoys a broader valuation advantage over the UK and its burgeoning use of technology put it in a different category to Tesco in its current guise.
But even trading on half the multiple Walmart enjoys would represent a significant rerating of the shares and provides something for Tesco to aspire to, assuming it can continue to deliver and build on its existing strengths.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
