(Bloomberg) -- Tesco Plc lifted its profit forecast as it attracted shoppers by keeping a tight lid on food prices and its own costs.
Britain’s biggest grocer now expects to deliver as much as £2.7 billion ($3.3 billion) in adjusted operating profit this year from its retail business, compared with previous guidance of flat profit. The stock rose as much as 3.2% Wednesday.
Tesco’s prices have never been closer to those of discounters, according to Chief Executive Officer Ken Murphy. Supermarkets have been trying to rein in prices during a historic inflationary surge in Britain which has lasted longer than expected.
As the largest operator in one of the world’s most competitive grocery markets, Tesco has kept a sharp eye on affordability by expanding a program to match prices with discount rival Aldi. It has also increased promotions offered through its Clubcard loyalty program.
The profit guidance should reassure investors given that management is usually conservative, wrote James Grzinic, an analyst at Jefferies.
“We’ve seen inflation come down progressively over the last six months, which gives you a clear indication our suppliers are working closely with us to try and drive down costs,” Murphy said on a call with reporters. Dairy and pasta prices are falling the most, while inflation is still pushing up the cost of chicken, meat and potatoes.
At the end of the first half, about 2,500 products were on average 12% cheaper than at the start of the year, the grocer said. Tesco has halved its pricing gap with the discounters over the past three years, according to Murphy. It’s four times smaller than it was in 2008.
Inflation started to slow in the first half as global commodity prices fell, and Tesco expects further easing for the rest of the year. The grocer said its focus on trying to keep food as affordable as possible meant shoppers bought more than anticipated, boosting UK like-for-like sales 8.7%.
Still, the main driver of sales growth is higher prices and volumes are marginally flat to down, Murphy said. He predicted a recovery in volume as inflation eases.
The retailer is on track to cut £600 million of costs by year-end.
Earlier this week, a report showed British shoppers enjoyed the first monthly drop in food prices in more than two years in September as retailers cut the costs of dairy products, fish and vegetables amid fierce competition between stores.
Read More: UK Stores Cut Food Prices For First Time In More Than Two Years
Rival Ocado Retail also said Wednesday it’s reducing prices on about 500 items including cereals, pasta sauces and tuna steaks, marking the fourth wave of cuts from the online grocery retailer since June.
“People are determined to enjoy Christmas this year, we are buying up on turkeys,” Tesco CEO Murphy said.
(Updates shares, adds CEO comments)
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