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Tesco has warned that its profits will be lower this year to give it more wriggle room to cut prices, after rival Asda signalled the start of a potential price war in the fiercely competitive UK supermarket industry.
The country’s biggest supermarket group said on Thursday that there had been a “further increase in the competitive intensity of the UK market” in the past few months and that a lower profit target for the year would give it the “flexibility and firepower to respond to current market conditions”.
Tesco, which last year had its highest UK market share since 2016, forecast group adjusted operating profit of between £2.7bn and £3bn for this financial year, compared with £3.1bn for the previous year.
Its shares fell more than 7 per cent in morning trading in London.
Smaller rival Asda last month said it expected significantly lower profits this year and would invest instead in lower prices for customers. The market was spooked by this signal of a potential price war and reacted by wiping more than £4bn off the value of the UK’s listed grocers.
Tesco’s chief executive Ken Murphy said on Thursday that other supermarkets were competing hard on price and that rivals “are clearly looking to defend the [market] share gains we’ve been taking”.
There had been an intensification of competition across the board, he said, not just from Asda. Tesco had been “super competitive, particularly over the last six to 12 months”.
The new guidance was “from a position of strength”, he added. “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 said Tesco “has done well to gain market share in recent years, but we note a step-up in competitiveness by some key peers may mean that further gains are more difficult to come by”.
Tesco said it was committed to offering the best value to its customers and that it would do more “to protect and strengthen our competitiveness”.
Promotional sales were 28 per cent of total grocery sales in March, the highest level for four years, according to data from Kantar.
Tesco reported a 3.2 per cent fall in pre-tax profit to £2.2bn for the year to February 22. Adjusted operating profit, its preferred metric, was up 10.6 per cent to £3.1bn. Sales were £63.6bn, up 3.5 per cent on the previous year.
It also announced a share buyback of £1.45bn to be completed by April next year, £700mn of which will be funded by the sale of its banking operations.
UK retailers are having to cope with higher costs because of increases to the minimum wage and employer national insurance contributions. Tesco said on Thursday that the impact of higher NICs, which came into force this week, will be £235mn this year.
