Tesco boss warns prices may go up as Iran-backed Houthi attacks on Red Sea shipping escalate

Tesco had its own good news but then warned shoppers bad could be coming 

Tesco’s managing director this morning said prices could go up after disruption in the Red Sea – as his firm announced it was in line for bigger-than-expected profits.

Vessels passing Yemen have come under frequent assault from Houthi rebels since Israel launched its offensive in Gaza following the October 7 terror attack by the Hamas group.

Shipping companies have responded by rerouting their vessels around South Africa to avoid the risk posed in the strait at a cost of £800,000 per boat.

And Tesco boss Ken Murphy has warned this could create a knock-on effect on the prices of some goods.

He said: ‘If they do have to go the whole way around Africa to get to Europe, it extends shipping times, it constrains shipping space and it drives up shipping costs.

Tesco boss Ken Murphy has warned Red Sea disruption  could create a knock-on effect on the prices of some goods

HMS Diamond and US jets shoot down biggest wave of drone and missile attacks in Red Sea on container ships

Vessels passing Yemen have come under frequent assault from Houthi rebels in recent days

‘So that could drive inflation on some items, but we just don’t know.’

It comes on the same day Tesco said it was on track for bigger-than-expected profits this year after record sales over the key Christmas period.

The supermarket giant said its growth was boosted by investment to keep prices low, as it has sought to stop shoppers switching to fast-growing German discount rivals Aldi and Lidl.

The retailer said it has cut ‘nearly 2,700 prices’ as part of this strategy to attract customers who have faced a surge in the cost of living.

Ken Murphy, chief executive of the retailer, said he expects food inflation to ‘continue to moderate’ through the rest of the year as energy prices become a tailwind.

However, he said there is still expected to be some inflationary pressure from labour costs in the food supply chain.

He highlighted that the commodity price of some products, such as potatoes and some meat, has not yet reduced despite overall inflation in the sector slowing significantly.

On Tuesday Tesco said like-for-like retail sales across the group rose by 6% over the six weeks to January 2024, compared with the same period a year earlier.

The Suez Canal is used by roughly one third of global container ship cargo and it is estimated that some 350 ships are being redirected around Africa. Maersk (pictured in Suez, Egypt, December 21) and Hapag-Lloyd, the world’s biggest shipping companies, are among those to have stopped using the vital trading route in favour of the longer, safer alternative

In the UK, sales across it stores grew by 6.8% over the Christmas period, with the company hailing a sharp rise in demand for its Finest premium range of food and drink products.

It came as the company also reported that like-for-like retail sales grew by 6.6% over the previous 13 weeks, the quarter to November 25, as it was boosted by strong growth in its UK and Ireland shops.

Tesco said it now expects a retail-adjusted operating profit of £2.75 billion for the year, up from a previous range of between £2.6 billion and £2.7 billion.

Mr Murphy said: ‘The Tesco team has worked harder than ever to help customers celebrate this Christmas, with our strongest ever range of great value, fantastic quality food.

‘Our powerful combination of great value, quality, availability and service means that we head into the new year in great shape to keep delivering for customers.’

The Suez Canal is used by roughly one third of global container ship cargo and it is estimated that some 350 ships are being redirected around Africa.

Maersk and Hapag-Lloyd, the world’s biggest shipping companies, are among those to have stopped using the vital trading route in favour of the longer, safer alternative.

BP also paused all of its tanker journeys through the Red Sea last month, and in a matter of weeks, companies have re-routed around $35bn worth of cargo.

Retailers and city analysts are now warning that if this situation continues it will lead to higher prices and product shortages on high streets by the end of the month.

A Houthi fighter stands on the Galaxy Leader cargo ship in the Red Sea in this photo released November 20 after taking control of the ship

People wait for boats to take them after touring the deck of the Galaxy Leader cargo ship, seized by the Houthis offshore of the Al-Salif port on the Red Sea in the province of Hodeidah

The Galaxy Leader cargo ship is escorted by Houthi boats in the Red Sea in this photo released November 20 after being hijacked

Marco Forgione, Director General of the Institute of Export and International Trade, told MailOnline: ‘The impact of the rerouting of shipping around South Africa’s Cape of Good Hope due to attacks in the Suez Canal over the last month will be felt by consumers in the coming weeks.

He said ‘the prices of many products’ are expected to rise ‘imminently following weeks of delays in products arriving in the UK.

‘We face an uncertain and potentially difficult period, with items including fruit, meats, seafood, grains, wine, tea, coffee, and clothing and key ingredients such as palm oil and energy costs all impacted by delays and knock on disruption to supply chains, which could take months to resolve.

‘Whilst it’s impossible to predict precisely how prices will rise […], it is inevitable that we will see the price of products on our shelves being impacted. Key indicators such as oil, wheat and rice have already increased by 5%,’ he added.

Speaking to the Daily Mail, Victoria Scholar, from online investment service interactive investor, warned: ‘There are concerns that the increased shipping costs could be passed on to consumers in terms of higher prices’.

This, she said, would fuel ‘a rebound in inflation of goods on shelves as well as supply chain disruptions, shortages and product delays.’ 

Susannah Streeter, head of money and markets at Hargreaves Lansdown, acknowledged there was ‘fresh nervousness about the prospects for conflict in the Middle East’.

She added: ‘Middle East tensions could be a big spanner in the works for any hope that the Bank of England might start tinkering early with interest rates.

‘Retailers are now warning that delays and an increase in shipping costs could force them to push up prices, causing a fresh inflationary headache for Bank of England policymakers to navigate.

‘Oil prices are fluctuating amid uncertainty over the security of supply in the Middle East and global demand, given that high interest rates are still set to weigh on key economies.

‘However, if attacks by Houthi rebels become more intense and if the Israel/Gaza conflict widens, there is likely to be a fresh move upwards, increasing transport costs further.’

High street retailers and manufacturers – ranging from Lidl to Ikea as well as the Chinese car manufacturer Geely – are diverting vessels carrying supplies around Africa, with both Ikea and Geely warning of delays and potential availability constraints.

The British Retail Consortium has cautioned the disruption could have a knock-on effect on product availability and prices. Chief executive Helen Dickinson said: ‘Over the coming months, some goods will take longer to be shipped.’

Speaking to the BBC, Shaan Raithatha, a Senior Economist & Strategist at Vanguard, said the decision by shipping companies to opt for the longer route around South Africa has ‘already resulted in a sharp increase in shipping costs’.

‘A way to judge the cost of shopping is the Shanghai Containerised Freight Index (SCFI) which measures the average cost of a 20-foot container being shipped from Shanghai to Europe,’ he told the British broadcaster’s Today Programme.

‘This index has jumped by over 50 percent over the last couple of weeks, suggesting that prices are now as high as they were back in September 2022.’

As of December 29, 2023, the index showed that the price of a shipping container stood at 2,694 dollars – up from $993 at the end of November.

Despite the sharp rise, Raithatha said the market’s reaction has so far been ‘fairly muted,’ but warned it could get worse the longer the Houthi threat continues.

‘The impact on inflation will depend on the magnitude of the current shock and there could be scope for further escalation here, but also the persistence of this disruption as well,’ the expert told the BBC.

He said that the costs still remain about a third of the level they reached at the height of the supply chain crisis, which peaked towards the end of 2021.

However, if the issue continues, he said the on-going crisis in the Middle East risks the promising inflation trajectory in the UK which has seen the rate decreasing in recent months. Britain’s Consumer Prices Index (CPI) rose by 3.9% in the 12 months to November 2023, down from 4.6% in October and 6.7% in September.