Tesco braces for supermarket price war with rival Asda

Tesco Supermarket In London — (Image credit: Mike Kemp/In Pictures via Getty Images)

Tesco’s CEO has warned of a “mounting price war among UK supermarkets”, with conditions in the sector becoming “very competitive”, says Isabella Fish in The Times. The country’s largest grocer is to “double down on cost cuts” in addition to lowering its profit forecast by up to £400 million for the year, from £3.1 billion to between £2.7 billion and £3 billion. The move comes after Asda recently pledged to “deliver its biggest round of price cuts in a quarter-century”, a move that has already wiped billions off competitors’ market values.

No wonder Asda has decided to cut prices, says Hannah Boland in The Telegraph. It needs to do something to “stop the rot”. Its market share has dropped from 14.8% to 12.6% in the last four years alone, with overall sales “slipping”. This represents an “existential” problem for a company “lumbering” under a £3.8 billion debt pile following a £6.8 billion takeover in 2021 by private equity firm TDR Capital. Viewed in this context, the price cuts seem to be an attempt to return to the “tried and tested strategy” that was credited with “fuelling a major upswing at Asda in the 1990s”.

Can Tesco keep up with its rivals?

It’s good news that Asda’s decision to try to win back some market share by lowering prices has “spooked” rivals such as Tesco, who are now “running scared”, says James Moore in The Independent. After all, it’s only fair that investors are now feeling a little pressure, given that Tesco has been “lining [its] pockets with gold”, with £864 million spent on dividends as well as another £1 billion on buying back shares. These numbers “tell you all you need to know” about who has been winning the “battle” between retailers and their customers, so “it is about time the scales tipped back” towards the latter.

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Price cuts may be “good news” for consumers, but it’s important not to overstate the threat they pose to Tesco, says Ian King on Sky News. While Tesco and Sainsbury’s have the “most to lose” from a turnaround at Asda, they are also “better placed than anyone else to withstand one”. Tesco’s Clubcard is “arguably the world’s most successful supermarket loyalty and rewards scheme”, providing the grocer with “data and insights no one else has, enabling it to react fast to changes in the market or to shoppers’ habits”.

Tesco has certainly shown that it is capable of matching rivals on price in the past, including the German “interloper” Aldi, says Alex Brummer in the Daily Mail. But the prospects of a price war between the major supermarkets that could hit profits isn’t the only reason why Tesco’s investors “aren’t terribly happy”. Its share price is also suffering from fears that consumer confidence is dwindling, while the £235 million hit to income from the national insurance increase and the impacts from the Employment Rights Bill are “still to be felt”. Nevertheless, the overall sector is less vulnerable than many think: “even in recession people want to eat well”.

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