TESCO has posted bumper profits as it claimed to be winning the supermarket wars amid challenging market conditions.

The group grew profits by 13% in the year to February 24, to £2.8 billion, from £2.5 billion last time.

The results cover a period in which retailers had to contend with the pressures on consumer spending that resulted from the surge in inflation fuelled by Russia’s war on Ukraine.

Tesco chief executive Ken Murphy said inflationary pressures have lessened substantially but things are still difficult for many customers.

He claimed: “Customers are choosing to shop more at Tesco, which is reflected in growing market share as they respond to the improvements we've made to the value and quality of our products.”

Tesco said it had cut prices on 4,000 items stored in UK stores, by an average 12%, as the group responds to the challenge posed by discounters. The Aldi price match applies to more than 600 products.

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The group has used offers linked to its Club Cards to win business. It has expanded its Finest range in a move that could encourage shoppers to switch from more upmarket chains.

Tesco grew sales volumes as well as values in the UK in the second half of the latest year.

The sales drive has been accompanied by cost cutting and efforts to increase efficiency. Tesco said it is using AI technology to drive productivity, competitiveness and value for customers. This includes a tool which automates bespoke product selection based on store location and demographic.

Tesco has shown faith in the value of bricks and mortar stores in the digital age. The number of UK stores increased by 74 in the latest year net of closures. The group said it expects to create around 2,000 additional roles across 70 new stores and its technology and online teams without providing details of locations.

The strong performance has allowed the group to reward shareholders. It has returned £1.8bn through share buy backs since 2021, with £1bn more planned for the current year. The annual dividend is increasing by 11%, to 12.1p per share.

The results were well received by analysts.

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Russell Pointon at Edison group said Tesco had shown its resilience in the face of market challenges.

Russ Mould at AJ Bell said: “This is a business that has come leaps and bounds from the days when it tried and failed to crack the US and achieved poor returns on the money invested across the group.”

However, Mr Mould said Tesco could face challenges if the Bank of England cuts interest rates as expected following the fall in the inflation rate. Tesco would then need to ensure that customers did not trade up to higher end rivals.

Sharon Graham of the Unite trade union said Tesco was raking in mountains of cash while families struggle to put food on the table because of sky high prices. The group said it balanced the needs of all stakeholders.

Tesco grew operating profits by 15.7% annually in the UK and Republic of Ireland to £2.7bn. Total sales rose by 7.3% on a like-for-like basis to £56.3bn.

The group owns the Booker cash and carry business.

Tesco said its UK market share increased by 0.28 percentage points year on year to 27.6%, with a particularly strong performance in its large stores.

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The group will book a £628 million loss on the sale of Tesco Bank’s credit card, loans and savings operations to Barclays, which was announced in February.

 The deal will involve 2,800 staff transferring from Tesco Bank to Barclays including hundreds in Glasgow and Edinburgh.

Tesco retained its insurance, ATM, travel money and gift card operations.

Tesco Bank previously withdrew from the current account and mortgages markets.

Tesco Bank operating profits increased to £148m from £135m in the latest year.

Tesco’s Central European business saw profits fall 50%, to £90m. Trading conditions were challenging across the region.

Shares in Tesco closed up 9.5p at 297p.