Tesco has said George Osborne’s new “national living wage” will cost it £500m by 2020, putting further pressure on profitability at Britain’s biggest supermarket.

The revelation comes as the retailer is expected to reveal another dive in pre-tax profits on Wednesday, with analysts at HSBC predicting it will report profits of £385m for the six months to the end of August, and Cantor Fitzgerald forecasting £330m. That compares with £916m in the same period last year.

Tesco is still in negotiations with the union Usdaw over this year’s pay deal for shop floor staff, but is under pressure to make a major improvement. Its rivals Morrisons, Lidl and Sainsbury’s have all moved to raise wages beyond the level of the national living wage, which comes into force next April. Under it, businesses will be required to pay at least £7.20 per hour to workers over the age of 25, rising to £9 by 2020.

The higher pay costs come as Tesco struggles to adapt to a rapidly changing market and the fallout from a £263m accounting scandal. The retailer is under investigation by the grocery market watchdog and Serious Fraud Office (SFO) over its dealings with manufacturers and distributors after the company mis-stated income from suppliers.

The SFO is thought to be keen to wrap up the investigation by the end of this year and has questioned the former chief executive, Philip Clarke, under caution, meaning that any testimony can be used in evidence.

The current Tesco boss, Dave Lewis, told an industry conference on Tuesday that the retailer had “changed for the better” despite falling profits. He said the chain had failed consumers by chasing its once-heralded 5.2% profit margin. Analysts have said margins for the first half of this year are likely to have fallen below 1%.

He said focusing on profits had led Tesco to make bad choices for staff as well as customers. “On behalf of myself and the team, the only thing we can say for the choices we made is sorry,” Lewis said.

His latest step in rebuilding Tesco’s reputation is to speed up payments to its smallest suppliers by a month.



The company announced it is to standardise and publicise terms across its business by June next year as it tries to improve relationships with suppliers. It said it also hopes to step up collaboration with them to come up with more new products for customers.



Lewis said: “We want to work with our suppliers to get back to innovating on behalf of our customers and these changes will make it easier for us to do that. Our customers want value, great availability and new choices.”

Since he took the helm a year ago, Lewis, who spent years working for Tesco supplier Unilever, has restricted the number of cases in which the supermarket will ask for financial contributions from suppliers, and introduced a code of conduct for buyers. Meanwhile, he is cutting the number of suppliers Tesco works with – with brewer Carlsberg the latest to have its products removed from shelves.

Under his latest scheme, suppliers who do less than £100,000 of business a year with Tesco will be paid within 14 days – that compares with between 40 and 60 days for most supermarket businesses, according to industry experts. Tesco said its smallest suppliers would typically be paid 34 days sooner under the new regime.



Tesco’s terms for larger suppliers will vary depending on the goods they deal in. Suppliers of fresh food – fruit, vegetables, meat, fish and poultry – that do between £100,000 and £10m of business a year with Tesco will be paid within 23 days, compared with 28 days for larger partners.

All overseas clothing and non-food suppliers will be paid within 90 days.

A spokeswoman for Tesco said most smaller and medium-sized suppliers would be paid faster. She said it was likely that some larger suppliers would be paid more slowly but they would benefit from a level playing field among all the companies with which Tesco does business.