Tesco has signalled that a price war among UK supermarkets is mounting, as its boss pointed to an “intensification” of competition across the sector and targeted as much as £500 million in fresh cost cuts.
Chief executive Ken Murphy said the company is facing mounting pressure to slash prices, after competitor Asda recently promised the company’s biggest price cuts in 25 years.
Tesco said it expects to make as much as £400 million less in profit next year as a result of what Mr Murphy called “a very competitive market”.
The company said in a statement: “In the last few months, we have seen a further increase in the competitive intensity of the UK market.
“We are committed to ensuring that customers get the best value in the market by shopping at Tesco and we see further opportunities to protect and strengthen our competitiveness.”
The grocery giant said it expects to see adjusted operating profit of between £2.7 billion and £3.0 billion, compared with £3.1 billion in the most recent financial year.
The guidance “gives us flexibility and firepower” to respond to mounting competition among supermarkets, Mr Murphy said.
Britain’s major grocery chains have been engaged in the early stages of a price war that has already wiped billions off their share prices.
It comes after comments by Asda chairman Allan Leighton, who in March promised sweeping price cuts in a bid to make it more competitive.
Tesco also said it is looking to cut a further £500 million from its overheads to “help offset new operating cost inflation”, partly as a result of recent tax hikes for employers brought in by the Government.
The company warned of price rises and inflation as a result of an increase in employer national insurance contributions (Nics) late last year.
The company said that about £510 million in cost cuts last year had come from bringing in more automation in warehouses and improving supply chains, among other measures, and that it would continue with the same savings plan this year.
When asked if the savings drive could mean cutting jobs, Mr Murphy said: “We never rule that out, but at the same time, we have a track record of managing it very well.”
In January, it announced 400 job cuts across both stores and head office as part of plans to “simplify” the business.
Nonetheless, Tesco also reported bumper sales for the most recent financial year, up 3.5% to £63.6 billion.
And the supermarket said it increased its market share across the UK to 28.3%, its highest point since 2016.
Mr Murphy added: “Despite inflationary headwinds, we are committed to ensuring customers get the best possible value by shopping at Tesco, and see further opportunities to strengthen our competitiveness.”
Julie Palmer, a partner at consultant Begbies Traynor, said Tesco’s cautious profit guidance is “a stark reminder” of the competition facing supermarkets.
“Clearly, no retailer is immune from the turbulence of today’s economy,” she added.
