Supermarket giant Tesco has revealed falling half-year profits and warned that annual earnings will be towards the lower end of expectations at a time of soaring inflation. Many customers are also “trading down” due to the cost of living crisis.

The group posted a 10 per cent fall in underlying retail operating profits to £1.25bn for the six months to August 27, despite group sales excluding fuel rising 3.1 per cent to £28.2bn.

It warned of “significant” 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 crunch.

It now expects annual underlying retail earnings of between £2.4bn and £2.5bn – the lower end of previous guidance for between £2.4bn and £2.6bn and a fall from the £2.7bn notched up in the previous year.

Tesco also unveiled its second staff pay rise this year to help support workers amid the cost of living crisis and said it is freezing the prices of more than 1,000 everyday products until 2023 to help cash-strapped customers.

It said the basic hourly rate of pay for store staff will increase by a further 20p to £10.30 – or £10.98 in London – from November 13, meaning hourly rates have increased by nearly 8 per cent this year.

Chief executive Ken Murphy said: “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.

“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.”

Supermarket giant Tesco has revealed falling half-year profits and warned that annual earnings will be towards the lower end of expectations amid soaring inflation and as customers trade down in the cost crisis.

The half-year results showed UK like-for-like retail sales edged 0.7 per cent higher over the first half, having fallen by 1.5 per cent in the group’s first quarter.

Richard Hunter, Head of Markets at interactive investor, commented: “These are tough times for many, and Tesco is not alone in feeling the resultant strain.

"As the pressure increases on an increasingly cost-conscious and cash-strapped consumer, the notoriously competitive sector in which Tesco operates has moved up another gear.

Mr Hunter added: “"Against that backdrop Tesco is suffering rather less than most of its competitors.

"Its focus on offerings such as the Aldi Price Match, Low Everyday Prices and Clubcard Prices have maintained its dominant market share. Retail sales have grown by 3.2 per cent on a like-for-like basis, and by 11.5 per cent compared to pre-pandemic levels, underlining the progress which the group has made.

"There has also been some normalisation in terms of shopping habits, with a general tendency for customers to return to stores.

"That being said, the momentum which the pandemic provided has resulted in an increase of over 50 per cent for online sales compared to the pre-lockdowns period.

He added: “Alongside a variety of offerings for the customer ranging from Click & Collect to convenience stores to the more popular online and store visits, the group is offering something for everyone and with a sharp focus on the customer budget.”

"Inevitably, the wider economic backdrop is leaving its mark and Tesco recognises the uncertainty of the remainder of the year in a cautious outlook statement.”

Tesco posts lower profits and warns over full-year trading pressures