Tesco's expansion into on-demand grocery delivery could add meaningfully to its sales and profit growth over the next two years, while putting pressure on rival Sainsbury's, according to analysts at Citi.
The broker said Tesco's first-half results had already begun to show the benefit of newer profit streams, with UK earnings growth of 6.1% comfortably outpacing like-for-like sales growth of 1.7%.
Citi attributed much of that gap to retail media income and Whoosh, Tesco's own rapid delivery service, which promises deliveries within an hour.
The broker said Tesco's recent launch on third-party delivery platforms, including Just Eat and Uber Eats, in August and September opens up a larger opportunity in what it calls the on-demand grocery segment.
If Tesco can grow its share of the on-demand market to match its existing share of traditional online grocery, Citi estimates the move could add 0.4 percentage points to like-for-like sales in the current financial year and 0.5 points in the year after.
The impact on group earnings growth is estimated at 0.8 percentage points in each of the next two years.
The flipside, Citi said, is that Sainsbury's stands to lose ground, with the broker forecasting a headwind of around 0.3% to Sainsbury's UK grocery revenues in each of the next two financial years.
That translates into a drag of 0.1 to 0.2 percentage points on Sainsbury's group earnings growth over the same period.
Citi has opened a 30-day negative catalyst watch on Sainsbury's ahead of its first-half results on 22 October and the next Kantar grocery market share data, due on 10 November.
The note was written by analyst Monique Pollard.
