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Tesco Warns Of Lower Profits And Cost Cuts As Competition Intensifies

Shares in Tesco were down more than 5% this morning after it warned its profit would likely fall this year, blaming increased “competitive intensity” in the market weeks after Asda signalled that it was willing to sacrifice margin to win back shoppers.

The UK’s biggest grocery retailer also revealed that it was seeking a further £500m in savings to help offset operating cost inflation, including the impact of the increase in National Insurance Contributions, which will be £235m.

Tesco is now forecasting adjusted operating profit of between £2.7bn and £3bn for its current financial year, compared with £3.1bn last year. The company noted that the lower profit target would give it the “flexibility and firepower to respond to current market conditions”.

Last month, Asda’s Chairman Allan Leighton said that the business was prepared to take a significant hit to its profit to finance a shift to a new low ‘Asda Price’ by the end of 2026 in a bid to recover lost market share. The statement led to shares in Tesco, Sainsbury’s and M&S tumbling on fears of a major supermarket price war.

Last year, Tesco achieved its highest UK market share since 2016 after successfully combatting the discounters and capitalising on the struggles of Asda and Morrisons. Speaking alongside its annual results today, Tesco’s Chief Executive Ken Murphy said that other supermarkets were competing hard on price and that rivals “are clearly looking to defend the share gains we’ve been taking”.

Murphy stressed that its new guidance was “from a position of strength” … “What we’re saying is, whatever the competitive environment and whatever comes our way, we’re capable of dealing with it.”

Analysts at RBC Capital Markets noted that Tesco had done well to gain market share in recent years but added: “We note a step-up in competitiveness by some key peers may mean that further gains are more difficult to come by”.

Some analysts doubt whether Asda has the firepower to maintain a prolonged price war, with other store and staff issues also holding back the business. Last month, Leighton admitted that the company had a lot of ground to make up and that its turnaround efforts would take years.

However, Richard Lim, Chief Executive of Retail Economics, said today there were “certainly signals in the market” that a price war is in the offing. He noted supermarkets had engaged in these battles in previous years, adding: “And we live in an incredibly competitive sector when it comes to the grocery sector so price and value is always that key determinant that drives consumers through the doors of the supermarkets.”

Meanwhile, Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said fears of a price war that could squeeze profitability have “weighed on sentiment across the sector recently”, but added: “It hasn’t materialised yet … Even if it does, Tesco reckons it’s in the most competitive position it’s been in for many years, helped by the Aldi price match and Clubcard prices keeping customers loyal.”

Tesco’s full-year results showed its adjusted operating profit was up 10.9% at constant rates to £3.13bn. In its UK & ROI division, this rose 10.3% to £3.01m, supported by strong volume performance and its cost-saving programme ‘Save to Invest’. In Central Europe, profits jumped 28.9% to £112m, driven by improved category mix, volume growth, and cost cuts.

Total group sales were up 4.0% at constant rates to £63.6bn, driven by like-for-like growth in the UK (+4.0%), Ireland (+4.6%) and Central Europe (+2.2%). However, Booker suffered a 1.8% fall after growth in its core retail and catering units was offset by declines in tobacco and its Best Food Logistics operation.

Murphy commented: “Our continued focus on value and quality, coupled with market-leading availability, has contributed to another year of increased customer satisfaction and our highest market share for nearly a decade. We have invested in bringing great prices to our customers throughout the year, and continued to innovate with over 1,600 new or improved products, including 400 new Finest lines, where overall sales grew 15%.

“We are also making significant progress on our long-term growth opportunities, further enhancing our digital capabilities with increased personalisation, further improvements to our online experience and an expanded retail media offering.”

Meanwhile, as businesses scramble to assess the impact of Donald Trump’s 10% tariffs on the UK and greater levies on China, cars and some metals, Murphy said the new taxes will have a “relatively small impact” on its operations.

“We don’t believe the impact of the tariffs are significant at this stage,” he told reporters this morning.

Murphy noted that this is due to the fact that the majority of its products come from UK suppliers, and it is entering a season where that proportion increases. He added that things are “moving very quickly” and it’s “hard to know” the significance of announcements.

NAM Implications:
  • Managing City expectations can buy support for lowered profits…
  • …and Tesco has sufficient ‘City credit’ to maintain medium-term stock market support.
  • (Keep in mind this announcement was just before today’s Trump tariff backdown)
  • i.e. the markets are now less spooked…
  • Meanwhile, if Tesco feel the need to fight a price war…
  • …they have deeper pockets than rivals.