Tesco: Who says it's hard to make home delivery profits?

Tesco has piled the pressure on its rivals to state whether they make any money from their online operations after the UK's biggest supermarket said its groceries home delivery business made a massive £127m profit last year.

The revelation came as its chief executive admitted Tesco must adapt to compete with discounters Aldi and Lidl, with both outperforming the traditional Big Four of Tesco, Asda, Sainsbury's and Morrisons at Christmas.

Philip Clarke also said £200m will be spent on price cuts, the slowdown in store openings will accelerate and focus on hitting its 5.2 per cent profit margin has come to an end.

The new strategy for the company, which was laid out at the London Stock Exchange yesterday, comes after Tesco has struggled in recent years to get to grips with its spending and improve the UK business which became overlooked in aggressive overseas expansion in the last decade.

But the revelation that its online groceries business is turning such a large profit will shock competitors and analysts who have said that home deliveries are notoriously loss making.

Sainsbury's and Asda have both refused to give figures on online profit while online-only rival Ocado has yet to make a profit.

Tesco added that it plans to double the number of click and collect grocery sites at stores, train stations and transport hubs to around 500, and plans to offer non-food home deliveries in one-hour slots.

Management also revealed that despite overall like-for-like sales falling 2.3 per cent online groceries sales were up 10 per cent last year and accounted for 8 per cent of food sales at Christmas. It was dragged down by a 3.1 per cent fall at large stores.

The falls at larger stores will see the company speed up refurbishments at its 247 hypermarkets, which will see the estate updated by 2017.

Focus will also be made on changing smaller stores, making them more relevant to local areas with 450 convenience stores updated each year. A further 150 convenience stores will also be opened each year.

The acceleration is set to come at the cost of large store openings which will slow from 1.4m sq ft of new space opened this year to just 700,000 sq ft open next year.

Mr Clarke also said capital spending on new stores, technology and existing stores will fall to £2.5bn next year for three years – a 10-year low – after admitting the high spending in 2008 was because management believed the recession would only last two years.

The price investment has puzzled some analysts who pointed out that a similar £500m investment in the "Big Price Drop" in 2011 failed.

Mr Clarke admitted: "We did launch the big price drop and everybody know it wasn't executed particularly well.

"We said the low prices would stay and they didn't but the prices are going to stay there and this time they will. We are going to do what we said."

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