Tesco today signalled an ”intense” new supermarket war as it said it had seen tougher competition from other supermarket chains in recent months.
Britain’s biggest retailer said it will give itself the “firepower” to respond to rivals’ cost cutting initiatives and protect its market share.
As a result it expects operating profits to drop to between £2.7 billion and £3 billion in the current financial year, down from £3.128 billion in the 12 months to 22 February.
This is well below City forecasts of around £3.2 billion for the current year and gives the grocer huge reserves of “dry powder” to wage a prolonged price war.
Tesco shares fell sharply on the warning and in early trading were down more than 6%, or 20.5p to 314.75p in an otherwise strongly rising stock market. It also dragged down Sainsbury’s shares which were 4,4% down to 225.4p.
As well as the threat from the German discounters Aldi and Lidl, Tesco is now facing new competition from a re-energised Asda under veteran retail Allan Leighton who launched a new “Rollback” discounting campaign earlier this year.
In its outlook statement Tesco said: “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.
“We are therefore providing guidance that gives us flexibility and firepower to be able to respond to current market conditions.”
The new guidance came as Tesco revealed a 10.6% rise in adjusted operating profits from £2.829 billion to £3.128 billion. Group sales up 3.5% at £63.64 billion.
Tesco also said it increased its market share is the UK to 28.3%, its highest point since 2016.
The company said it will be looking for cost savings of around £500 million in the current year “to help offset new operating cost inflation, including the impact of an increase in National Insurance contributions of £235 million”.
Chief executive Ken Murphy said:”Building on our strong financial performance, robust balance sheet and positive momentum, we are setting ourselves up for the year ahead with the flexibility to continue to win in a highly competitive market.
“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. By putting customers first, we will continue to create sustainable value for every stakeholder in Tesco."
Aarin Chiekrie, equity analyst,at investment platform Hargreaves Lansdown said: “Fears of a price war that could squeeze profitability have weighed on sentiment across the sector recently, but 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. And despite recent headlines, Asda doesn’t appear to have the financial firepower to disrupt this dynamic.”
Richard Hunter, head of markets at interactive investor, said: “The upcoming battle is for Tesco to lose rather than Asda to win. The fact remains that the group’s market share has risen yet again to 28.3%, which is equivalent to that of its nearest rivals, Sainsbury and Asda, combined.”
