Tesco boss Ken Murphy was adamant last week there was no evidence of an “irrational price war” between the UK’s supermarket chains. Yet the chief executive of the country’s leading grocer appears to be preparing for one.
Tesco warned that its annual profits would fall by up to £428mn this year to free up the “firepower” needed to cut prices and stay ahead of rivals. While Murphy did not mention the aggressor by name, there was no doubt as to whom he was referring.
Last month, Allan Leighton, who became Asda’s executive chair in November, said the struggling chain was prepared to take a significant hit to profits this year in order to fund price cuts.
The comments alarmed investors, particularly those outside the UK who thought supermarkets would be a haven in volatile markets and now found themselves staring into a potential price war. The ensuing sell-off wiped more than £4bn off the value of the UK’s listed grocers: Tesco, Sainsbury’s and Marks and Spencer.
A source close to Asda said Leighton’s statement “had people rattled”. Meanwhile, a person familiar with Murphy’s thinking said Tesco’s response was guided by the logic that “if you don’t send a signal, you invite more pressure”.
Murphy, justifying the move to analysts this month, said: “You can’t really afford to blink in this industry — it’s so competitive — and I think we should assume that people will look to stay competitive.”
Sainsbury’s boss Simon Roberts sees the situation in a similar way. On Thursday, the UK’s second-largest supermarket chain said the need to cut prices meant it expected profits to flatline this year.
Roberts insisted, however, that Sainsbury’s had not made any changes “in response to the noise that’s out there”.
That noise is unsettling investors, nevertheless. Manjari Dhar, consumer analyst at RBC Capital Markets, said there were fears the industry would descend into a margin-shredding price war.
If such a war were to be waged, Tesco looks best placed to cope. The UK’s biggest supermarket chain, with 27.9 per cent market share, made an operating profit margin of 4.6 per cent in the UK and Ireland last year. Sainsbury’s made a margin of 3.2 per cent and Asda’s margin last year was below 3 per cent, according to Dhar.
Asda forged its identity as Britain’s cheapest supermarket, but its place in the market was undermined after the 2008 financial crisis, when German discounters Aldi and Lidl, which sell a tighter range of groceries at lower prices, expanded nationwide. Their growth forced established supermarkets to slash prices to win back shoppers.
The discounters had disrupted “a fat oligopoly of supermarkets that were earning too much”, said Bernstein analyst William Woods. But, Woods added, the driver of price competition in 2025 was simply “a distressed supermarket [Asda]” that had pushed prices up too high and was now “trying to fight against a much more professional set of competitors”. A person close to Asda said it did not recognise this description of the grocer, which had set out a clear turnaround plan.
Asda has been losing market share under the ownership of private equity firm TDR Capital and the Issa brothers, which acquired the supermarket from Walmart in a £6.8 billion leveraged buyout in 2021.
Leighton, who is embarking on his second turnaround mission at Asda, after helping steer it away from bankruptcy in the 1990s, said last month he wanted to re-establish a price gap of between 5-10 per cent with the UK’s other mainstream supermarkets.
Asda said it had already started to make progress on this, having relaunched its “rollback” pricing strategy, where products are placed on promotion for up to 12 weeks before settling below the original price.
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However, analysts at Bernstein found that even after Asda lowered prices it was “not massively undercutting Tesco”. Both Dhar and Woods said the strain from Asda’s £3.8 billion net debt — the supermarket’s finance costs were almost £440mn in the nine months to September — would limit its ability to sustain a price battle with Tesco as well as its efforts to fix availability and ranges.
Supermarkets’ relationships with suppliers, who have limited funds to invest in promotions, will also be crucial to winning their backing for price cuts on branded groceries.
Ged Futter, a former buyer for Asda who now trains suppliers to negotiate with supermarkets, said Asda’s poor recent performance meant it would struggle to gain their support. Suppliers might fear the additional sales they generated from the promotions would not compensate for the margin they sacrificed. “I don’t think the belief is there. Suppliers haven’t been given a big enough reason to back them,” Futter said.
A source close to Asda, however, said it had long-standing positive relationships with suppliers.
Analysts believe the inflationary pressures squeezing all supermarkets, mainly from rising employment costs and a forthcoming packaging levy, will cap the extent of the price cutting across the board.
The price reductions that do materialise will also land in a market where prices are steadily drifting upwards. UK food inflation, which came in at 3 per cent in March, is expected to rise in the coming months because of recent increases in staffing costs and energy bills.
“I actually don’t think you’ll see prices going down,” said RBC’s Dhar. “I think you’ll just see less inflation than you otherwise would have.”
Asda said: “We have started as we mean to go on by reducing the prices of over 10,000 products . . . since January. This is a long-term commitment with a material strategic investment to lower prices for hard-working families.”
