3 catalysts for Tesco shares to rise in 2023

High inflation has forced many supermarkets under pressure on margins, and customers are tightening their belts. As a result, Tesco (LSE:TSCO) shares declined more than 20% last year as the bottom line took a substantial hit. However, I think these three catalysts could allow the stock to do well in 2023.

1. Food inflation is down

Balancing shareholder returns while satisfying a customer is a tightrope Tesco management has had to walk on. However, the latter has taken priority. At FTSE 100 The company has chosen to absorb many cost increases, especially in food.

As a result, the profit margin has increased significantly over the past year. This was most evident when Tesco showed its latest half-year results, which saw a 67% drop in net profit despite a 6.7% rise in revenue.

Having said that, the slim margin may be getting closer. This is because food inflation is starting to slow. The combined impact of lower energy and commodity prices is beginning to affect food prices. If food inflation continues to cool, or even reverse in 2023, I could see Tesco starting to expand its margins again, which would be positive for the stock.

2. successful evolution of Clubcard

The conglomerate will also launch a new version of its Clubcard app. It is expected to include more features and personalization in an effort to prevent competition from adding loyalty schemes to other supermarkets.

Tesco CEO Ken Murphy said he hoped the revamped scheme would boost customer volumes through better and more personalized offers. After all, Britain’s biggest supermarket will be offering more coupons to loyal shoppers. It will be given every two weeks, instead of eight times the previous year.

If the new initiative is successful, I can imagine retailers benefiting greatly as they continue to assert their already dominant position in the supermarket sector.

3. Diversify into advertising

That being said, the most exciting way for Tesco shares this year is to venture into advertising. It seems odd that a supermarket is entering such a competitive space. But I would argue that Tesco’s dominance puts it in a very good position.

A data science business, Dunnhumby can quantify the amount of data it collects from customers and use it to capitalize on a profitable revenue stream. The company has expanded on this with its new Clubcard scheme.

In addition, management decided to try to sell advertising space on the website and in stores. The group has installed hundreds of ‘smart screens’ at store entrances through a partnership with JCDecaux.

The move could be used to prop up Tesco shares as the headwinds in 2022 could be this year’s tailwind. These ad efforts can also help boost your small margins, if successful.

However, I don’t like investing in companies with low profit margins due to a lack of pricing power – and the past year has shown me why. Therefore, while I think Tesco’s short-term future is brighter than it was 12 months ago, I am reluctant to invest until I see meaningful margin expansion.