TESCO (TSCO) SHARES: 2025 PERFORMANCE IN UK, KEY DRIVERS, MILESTONES AND RISKS —'26 OUTLOOK

Reviewing Tesco’s Stock Performance in 2025

Tesco Plc (LON: TSCO), one of the UK’s largest supermarket chains and FTSE 100 constituents, experienced a year of strategic resurgence and cautious optimism in 2025. After years of margin pressures and intense competition in the UK grocery sector, Tesco demonstrated resilient fundamentals in a dynamic retail climate.

Share Price Movement

At the beginning of 2025, Tesco’s share price hovered around 275p. Throughout the year, shares gradually appreciated, closing just above the 300p mark in December 2025, reflecting an annual increase of approximately 9%. This relatively modest performance outpaced some sector peers, underpinned by steady revenues, tighter cost controls, and robust online segment growth.

The share price trajectory was marked by short-term volatility, largely driven by broader market movements and consumer confidence fluctuations tied to inflation and interest rate decisions by the Bank of England. Nonetheless, Tesco maintained investor appeal through a consistent dividend payout and strengthened financial outlook.

Financial Highlights

• Revenue: Tesco reported group sales growth of 5.1% year-on-year, supported by continued strength in UK like-for-like sales and improved performance in Booker and Central Europe operations.
• Profitability: Adjusted operating profit rose to £2.9 billion, reflecting improved margin management and supply chain efficiencies.
• Dividends: The final dividend declared in 2025 was 8.7p per share, bringing the full-year dividend yield to around 4.2%, a key anchor for income-focused investors.

Market Position and Strategic Moves

A significant contributor to Tesco’s performance was its continued brand strength, underpinned by a value-led proposition via Aldi Price Match schemes and Clubcard pricing, helping it retain market share amidst consumer cost-consciousness.

Additionally, Tesco’s digital channels continued to perform strongly. Its grocery home delivery and click-and-collect operations exceeded pre-pandemic highs, with technology investments streamlining operations and improving consumer satisfaction across channels.

Acquisitions and partnerships remained modest in 2025. However, Tesco's measured approach to expansion allowed for internal consolidation and efficiency gains, particularly within the Booker wholesale arm. Tesco also committed to furthering its ESG goals, with new sustainability targets including lower emissions and reduced food waste.

Investor Sentiment

Institutional support remained stable, with significant holdings by investment funds and pension managers citing Tesco’s strong cash flow generation and reliable dividend track record. However, analysts remained mixed on long-term price targets, with macroeconomic conditions tempering optimism for 2026.

Key Drivers Behind Tesco’s 2025 Performance

The forces propelling Tesco’s stock performance in 2025 were multifaceted, with both macroeconomic and company-specific elements contributing to investor confidence. Understanding these drivers can help contextualise the supermarket giant’s trajectory and anticipate future developments.

1. Cost-of-Living Adaptation

In response to the persisting cost-of-living crisis in the UK, Tesco adapted by enhancing its discount offerings and sharpening its pricing strategy. The continued expansion of Clubcard-exclusive discounts, Aldi price-matching protocols, and loyalty incentives made Tesco a compelling option for value-seeking customers, supporting volume growth and customer retention.

As inflation eased slightly in 2025, Tesco also benefited from a slow shift in consumer purchasing behaviours — moving from budget lines back to branded goods. This margin-friendly consumer pivot provided a modest boost to profitability per unit sold.

2. Operational Efficiencies and Technology

A significant uplift in profitability came from operational improvements. Tesco expanded its use of automation in distribution centres, optimised store layouts, and introduced AI-led demand forecasting tools to better align stock levels with customer trends. These measures reduced wastage, enhanced inventory turnover, and shortened delivery lead times.

Digital transformation also remained a central focus. Tesco’s mobile app usage surged by 18% year-on-year, supported by functionality upgrades, better personalisation algorithms, and seamless integration with payment providers. These enhancements pushed average basket sizes and improved app retention rates among core demographic segments.

3. Strength of Booker and Wholesale Operations

Booker Group, Tesco’s wholesale arm, delivered another strong year. Growth in convenience retailing and catering solutions, underpinned by reopening trends in restaurants and hospitality post-COVID disruptions, bolstered top-line results. Margin improvements in Booker also contributed to group-wide operating efficiency gains.

Cross-selling between Tesco and Booker customers also saw modest improvement, with shared logistics enabling scale benefits. Management hinted at broader integration plans that may unlock further efficiencies in 2026.

4. Investor Communication and Guidance

Clarity from management on medium-term goals and forward-looking guidance provided needed transparency for investors. Capital deployment discipline, lower net debt, and reiteration of share buyback intentions signalled confidence in Tesco’s balance sheet health and future earnings potential.

Furthermore, Tesco’s AGM and quarterly investor briefings were well-received, reflecting improved investor relations culture and timely responses to stakeholder concerns, especially around ESG transparency and executive compensation.

5. UK Economic Sentiment and Sector Rotation

Sector rotation in UK equities back into defensives—spurred by ongoing economic uncertainty—favoured consumer staples stocks like Tesco. Investors pivoted towards low-volatility, dividend-paying companies, benefitting large supermarket operators with scale, such as Tesco.

While broader FTSE-listed retailers grappled with rising costs and tighter credit markets, Tesco’s stable free cash flow and dividend allure made it a relatively attractive play, especially for pension funds and conservative portfolios.

Risks and Catalysts: What to Watch for in 2026

Looking into 2026, Tesco’s growth outlook faces both opportunities and headwinds. Investors will closely monitor several evolving trends and company-specific initiatives that may shape share price trajectory and sentiment in the coming year.

1. Margin Pressure Risks

Despite solid profitability in 2025, competition within the UK grocery sector is expected to intensify. The discount grocery duo of Aldi and Lidl continue to gain traction, with aggressive expansion plans and newer format stores targeting urban geographies where Tesco has traditionally been dominant.

In response, Tesco must maintain delicate balance between sustaining margins and offering competitive pricing – particularly as input cost volatility may return due to commodity supply disruptions or FX movements.

2. Regulatory and Taxation Developments

Potential changes in corporate taxation and employment regulations under a new UK government (post-election scenario in late 2025 or early 2026) could affect profit margins. The grocery sector has been discussed as a candidate for windfall taxes or regulatory tightening, especially on pricing practices and food inflation contribution analyses.

Additionally, stricter environmental disclosures and reporting requirements may increase compliance costs, even as Tesco continues to score relatively well on ESG metrics.

3. Growth Opportunities

Investors are eyeing growth opportunities in both Booker and Tesco’s digital channels. If Tesco can deepen its penetration in convenience formats, on-demand delivery partnerships, and white-label services, it may counterbalance the pressures of mature core markets like hypermarkets.

There’s also scope for Tesco to expand financial services offerings and monetise its massive data ecosystem via retail media or targeted advertising opportunities – a strategy rival retailers have successfully explored.

4. Dividend and Capital Allocation Policy

Tesco’s dividend policy will likely remain a cornerstone of its investment appeal. Sustaining or increasing payouts above inflation will be critical in attracting income-seeking investors. Share buybacks also remain a possibility, subject to net cash flow strength.

2026 may also see Tesco revise its capital allocation framework, with potential investments in supply chain automation, store refurbishments, and software technologies prioritised alongside ESG-compliance initiatives.

5. Macroeconomic Headwinds

The macroeconomic environment remains the largest external variable. A sharper-than-expected economic slowdown, persistent high interest rates, or resurgence in inflation could dampen consumer confidence and spending frequency in discretionary segments, impacting average basket volumes.

Conversely, an improving economic outlook — with rate cuts and real wage growth — would enhance Tesco’s operating environment, potentially boosting its share price to new highs.

Conclusion

As Tesco enters 2026, its resilient income profile, scalable digital infrastructure, and steady leadership position in UK grocery offer structural stability. Yet, challenges from regulatory shifts and competitive pricing pressure loom. Investors should track Tesco’s dividend trajectory, innovation pipeline, and economic indicators closely, as these will play a pivotal role in shaping near-term share performance.