Tesco could start offering current accounts and mortgages as early as next year to take advantage of banks' current problems, but is first trying to cover its back by boosting its range of discount products to compete with the likes of Aldi and Lidl.
The company's shares rose 17.7p, or 4.8%, to 387.6p yesterday after it met analysts' forecasts with a 10.3% rise in first-half profits to £1.45bn.
Around half of profit growth at Tesco, which runs more than 3700 stores in 13 countries, came from international markets. It is doing particu- larly well in Korea and planning a massive expansion in China. The 27% rise in international sales was also helped by the weakening pound.
In the UK, like-for like sales rose 3.7% excluding petrol, although the company noted the rate of growth rose from 3.5% to 4% over the period.
"Concerns about Tesco's UK business have been overplayed," Christopher Hogbin, an analyst at Bernstein Research, said in a note.
Tesco chief executive Sir Terry Leahy said that economic conditions were not as tough as the early 1990s, with lower interest rates and unemployment, but he acknowledged that customers are looking for bargains.
"It is no secret we have lost a few customers to some of the retailers with a strong price image," he said yesterday.
Tesco has unveiled an expansion of its Discount Brands offering, a 400-strong range of goods, including tea bags, fish fingers and cleaning products, under 34 brands that fit in between Tesco's standard and value offerings. The move is aimed at tackling discount supermarkets head on.
"We are already through the anniversary of Northern Rock (which suffered funding problems last summer) which was when customers really took a hit and changed their shopping behaviour. In a way we have absorbed that. We are looking forward. In the autumn, there is an opportunity for Tesco to make up a bit of ground on the price-based retailers we missed in the autumn of last year," Leahy said.
Tesco is already looking beyond the credit crunch with ambitious plans for its Tesco Personal Finance arm. It bought Royal Bank of Scotland's 50% share of the business in July for £950m in cash.
Tesco finance director Andrew Higginson, who will run the business, said yesterday that the company saw a space in the market now that it is becoming more concentrated with the proposed mergers of Lloyds TSB and HBOS and the takeover of Alliance & Leicester and Bradford & Bingley's deposit base by Abbey owner Santander.
"I think the opportunities in banking are probably bigger now than when we first announced the deal," he said.
Higginson reckons customers scared by the turmoil in banking are "looking for someone they can trust".
"People are genuinely worried about where to put their savings," he added.
"In that kind of environment and where we are seeing a couple of big groups emerging, concentrating consumer choice, there is an opportunity for a brand like Tesco to come in."
Tesco is currently moving customer data from Royal Bank computers to its own but indicated it would make a push into the current account market once this was done.
"It will be a year before we get to that position," Higginson said, but added that offering current accounts, while "not particularly profitable", would help bond together the company and the consumer. The company is also eyeing up the mortgage market now that rising rates have made margins more attractive.
On food price inflation, Leahy said yesterday that this "looks to have peaked", and will probably remain positive but falling. However, he acknowledged that a lot of the falls the company is seeing in the prices of goods being offset by rising energy costs.
Overall, the company recorded sales of £25.6bn, up 13% on last year.
The interim dividend was raised 11.6% to 3.57p.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article