Tesco Premium

“Is it safe?” hissed Laurence Olivier as he drilled into Dustin Hoffman’s molar in Marathon Man. That is the question uppermost on investors’ minds. As its 10 per cent increase in first half profits on Tuesday showed, Tesco is about as safe as things come in these uncertain, paranoid times.

True, the world’s third largest retailer is not entirely defying gravity. UK underlying sales growth of 3.7 per cent lags behind more price-orientated competitors such as Morrisons and Wal-Mart’s Asda, even if the threat from “deep” discounters such as Aldi is exaggerated. Asda is achieving superior growth in spite of more exposure to volatile non-food products. Tesco’s 4 per cent higher non-food sales came from a significant, unspecified, space rise– meaning sales densities fell. Internationally, sales growth of 1 per cent from stores open at least a year is underwhelming, given the amount of space added. Growth is also being bought with eye-watering capital expenditure – up from £1.6bn to £2.5bn in the first half. But the overall package remains solidly attractive. With innovations such as Tesco Value in 1992, and its recent “Discount Brands at Tesco” range, Tesco has proved it can trade resiliently through UK downturns, and outperform in the good times. Meanwhile, it has made a better fist of international expansion than many peers, positioning itself well to take advantage of opportunities in countries such as China. Sir Terry Leahy, its phlegmatic chief executive, is creating a group with sufficiently diverse formats, store sizes and markets that it can withstand most setbacks.

The danger is that an economic slump induced by the banking turmoil could lure UK supermarkets into their first genuinely no-holds-barred price war since the 1970s. Tesco’s size, and marketing and retail execution skills, should help it weather even that. At 14 times current-year earnings, its shares hardly fall in the deep discount category. But safety has a price.

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