TESCO’s chief executive Ken Murphy has said that the company knows its customers are “facing a tough time and watching every penny to make ends meet” as it reported a fall in first-half profits.

Despite a rise in like-for-like retail sales, the supermarket giant said it expects to report retail adjusted operating profit for the full year of between £2.4 billion and £2.5bn, which is at the lower end of previous guidance of between £2.4bn and £2.6bn and a fall from the £2.7bn in the previous year.

One analyst said the downward weight on consumer spending are “slowly starting to feed into performance” for the grocer.

Shares were up more than two per cent in early trading but closed down.

The group warned of inflation pressures and a return in food shopper habits to those seen before the pandemic, which it said were being compounded by customer moves to rein in spending amid the cost of living crisis.

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“Significant uncertainties in the external environment still exist, most notably how consumer behaviour continues to evolve,” Tesco said. “Our strong and ongoing focus on cash and a more positive expectation on working capital leads to an upgrade in our expectation for full year retail free cash flow to be at least £1.8bn.”

The more cautious outlook came as it posted a 10% fall in underlying retail operating profits to £1.25bn for the six months to August 27, despite group sales excluding fuel rising 3.1% to £28.2bn.

Tesco, which has 215 stores in Scotland under various formats, also unveiled its second staff pay rise this year to help support workers amid the cost crisis and said it was freezing the prices of more than 1,000 everyday products until 2023 to help customers.

It said the basic hourly rate of pay for store staff will increase by a further 20p to £10.30 from November 13, meaning hourly rates have increased by nearly 8% this year.

Mr Murphy said: “We know our customers are facing a tough time and watching every penny to make ends meet. That’s why we’re working relentlessly to keep the cost of the weekly shop as affordable as possible.

“As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market.”

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The half-year results showed UK like-for-like retail sales edged 0.7% higher over the first half, having fallen by 1.5% in the group’s first quarter. Online sales and orders both remain greater than 50% ahead of pre-Covid levels.

Tesco Bank’s adjusted operating profit was £67m, versus £12m last year.

The former “big four” supermarkets have come under increasing pressure from the German discounters as shoppers seek better value, with Aldi recently leapfrogging Morrisons to become the UK’s fourth largest supermarket for the first time.

Mr Murphy said customers were buying less on each shopping trip, switching to cheaper own-brand products and from fresh to frozen food as part of efforts to cut costs in the face of soaring inflation, which hit 9.9% in August.

The group has also seen a drop in non-food and clothing sales as part of customer cutbacks across the country.

The Herald: Source: London Stock ExchangeSource: London Stock Exchange (Image: LSE)

“Customers are seeking out the quality and value of our own-brand ranges as they work to make their money go further, whether they are switching from branded products, between categories or cutting back on eating out,” he said.

While Mr Murphy highlighted uncertainties, he said customers are “determined to enjoy” the festive season.

“We think it’s going to be a Christmas that people are going to want to celebrate but will want to celebrate in a more affordable way,” Mr Murphy also said: "As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market.”

Matt Britzman, equity analyst at Hargreaves Lansdown, said: “Amongst the larger players, Tesco’s arguably been one of the standout businesses in the battle against low-cost outfits, but pressures on consumer spending can only build for so long before something must give.

“That pain’s slowly starting to feed into performance, as shopping behaviours continue to normalise from bumper levels seen over the pandemic and inflation keeps costs high - that’s meant full-year profit guidance got a slight downgrade toward the bottom end of the previous range.”

Shares in Tesco closed down 4.14%, or 8.7p, at 201.3p.