Tesco saw its profit more than half last year before tax as the business faced “unprecedented” rises in the prices that its suppliers were charging.
Bosses said the supermarket giant had come under pressure from rising prices as its customers also struggled under soaring inflation.
Pre-tax profit fell from just over £2bn to around £1bn in the year to the end of February, the business revealed on Thursday.
On an adjusted basis, which strips out some one-off costs including a nearly £1bn charge on property, operating profit dipped 6.9% to £2.6bn, in line with what analysts had expected.
The profit was hit by a trio of issues, including lower sales volumes, investment in the business and steep cost rises, Tesco said.
“It’s been an incredibly tough year for many of our customers, and we have been determined to do everything we can to help,” said chief executive Ken Murphy.
“Our results reflect our continued investment in delivering great value and quality for our customers, whilst at the same time looking after our colleagues.
“This is despite unprecedented levels of inflation in the prices we have paid our suppliers for their products, and the cost of running our own operations.”
But despite problems, Tesco said it had delivered a “market-leading performance” over the Christmas period.
Data from Kantar released in January showed that while Tesco had the largest market share of any supermarket in the UK, it was not the fastest-growing traditional grocer.
Asda’s sales grew quicker over Christmas while non-traditional grocers grew even faster.
Tesco also said it had continued to “inflate behind the market” over Christmas, which is thought to mean that it increased prices slower than the competition.
The business said it had taken a £982m hit to statutory profit, largely due to an impairment charge on its assets, mainly its property portfolio which was hit by an increase in discount rates.
Zoe Gillespie, investment manager at RBC Brewin Dolphin, said: “Tesco is continuing to cement its position as the UK’s top supermarket.
“Profits may be down, but that was to be expected from the pressures of the cost-of-living crisis and post-pandemic normalisation in shopping habits.
“Sales growth, meanwhile, remains robust and Tesco is well placed to benefit from consumers looking to save on their weekly shop through its different initiatives – particularly its Clubcard scheme.
“While profits are expected to be flat for the year ahead, the continuation of its share buyback scheme and strong execution of its strategy mean Tesco remains in good shape.”