Questor: online sales have finally allowed Tesco to turn the tide against Aldi and Lidl

The coronavirus pandemic has prompted a sharp increase in the proportion of British retail sales conducted online. In February around 19pc of sales were made over the internet, but by May that figure had risen to almost 33pc.

The shift to e-commerce began long ago but the pandemic has forced more shoppers to rely on home deliveries. Many, in Questor’s opinion, are unlikely to return to the shops on the same scale as before.

Growth opportunities therefore abound for retailers with established online operations. One is Tesco, tipped here in April 2018. It now has a 33.5pc share of the online grocery market after its e-commerce business grew its sales by 63pc over the past year.

Rising demand for online delivery gives the retailer a competitive advantage over sworn enemies Aldi and Lidl. They have been a persistent threat to Tesco as a result of their no-frills business models and low prices. However, thanks to their lack of online scale, Tesco may find that its competitive edge grows.

Already this year the chain has brought to an end a long-standing trend of losing customers to Aldi, aided by its promise to “price match” the German chain. This has resonated with price-conscious shoppers at a time when consumer sentiment has slumped to its lowest level since the financial crisis.

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While seen as good value for money by shoppers, Tesco is increasingly regarded as a retailer of quality own-brand products. This culminated recently in its highest brand strength score since 2011.

In addition, the firm recently outperformed all major rivals on customer perceptions of their response to Covid-19. This could prove highly relevant: the risk of a second wave of the virus may prompt shoppers to favour retailers perceived as safe. More than 90pc of consumers are confident in Tesco’s social distancing measures and consider its stores to be “safe places to shop”.

Many of those shoppers are likely to benefit from the firm’s increasingly attractive Clubcard membership offer. Its Clubcard Plus subscription offer has been more popular than it expected. This could differentiate Tesco’s offering and enhance customer loyalty in a saturated grocery market.

Tesco’s wholesale subsidiary, Booker, also has the opportunity to expand its market share as a result of evolving trading conditions.

Although its sales have fallen heavily as a result of lockdown measures implemented across the hospitality sector, it has increased its market share in the first quarter of the financial year by nine percentage points to 23pc.

Questor is conscious that Tesco’s progress could be checked by events such as the departure of its chief executive, Dave Lewis. Mr Lewis, a key part of its successful turnaround over the past five years, will be replaced in October. Likewise, weak recent performance from Tesco Bank and an increase in its bad loan provisions may persist in the months ahead and drag on the firm’s overall performance.

This could be compounded, in the near term at least, by higher costs related to the pandemic. The hiring of additional staff, and investment made in quickly doubling its online capacity, mean that the company’s guidance is now for a flat retail operating profit in the current financial year. Further such costs may be incurred in any second wave, although they are likely to be mitigated to some extent by government policies such as business rates relief.

In our view Tesco’s long-term growth potential outweighs the short-term risks. It is in an enviable position to grow its sales and profits as demand for online grocery deliveries soars. Its innovative pricing strategy, improving perception among customers and growth opportunities in wholesale food services suggests that it continues to have investment appeal.

Questor says: buy

Ticker: TSCO

Share price at close: 220.7p

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