Tesco boss Ken Murphy last week had no evidence of an “irrational price war” among British supermarket chains. But the chief executives of the country’s major grocery stores seem to be preparing for it.
Tesco warned that annual profits will fall to £428 million this year to cut prices this year and unlock the “fire power” needed to stand ahead of its rivals. Murphy didn’t mention the attacker by name, but there was no doubt as to who he was referring to.
Last month, Alan Leighton, who became Asda’s executive chair in November, said the struggling chain is ready to take a major blow to profits this year due to price cuts.
This comment was particularly shocked by non-British investors who thought supermarkets would become a paradise for volatile markets, but now they find themselves staring at a potential price war. Subsequent sales wiped out more than £4 billion from the value of UK listed grocery stores: Tesco, Sainsbury’s, Marks and Spencer.
A source close to Asda said Leighton’s statement was “people were rattling.” Meanwhile, those familiar with Murphy’s ideas said Tesco’s response was led by the logic that “if you don’t send a signal, it will induce more pressure.”
“We can’t afford to blink in this industry, it’s competitive,” said Murphy, who justified his transition to analyst this month.
Sainsbury 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 means profits are expected to be flatline this year.
However, Roberts argued that Sainsbury had not made any changes “in response to the noise there.”
Nevertheless, the noise has made investors uneasy. Manjari Dhar, consumer analyst at RBC Capital Markets, said the industry could plunge into a margin shredded price war.
If such a war unfolds, Tesco looks great to deal with. The UK’s largest supermarket chain, with a market share of 27.9%, last year saw its operating profit margins in the UK and Ireland reach 4.6%. According to Dhar, Sainsbury’s accounted for a margin of 3.2% last year, with Asda’s margin being less than 3%.
Asda forged its identity as the UK’s cheapest supermarket, but its market position was eroded after the 2008 financial crisis. Their growth forced established supermarkets to cut prices to get shoppers back.
Bernstein analyst William Woods said the discounts disrupt “fat removal from the earning supermarket.” However, Woods simply said that the driver of the price competition in 2025 was a “stricken supermarket (ASDA)” who simply said they were “trying to compete against a much more professional competitor” by raising prices too much. Someone close to Asda said he was unaware of this explanation from the grocery store.
ASDA lost market share under the ownership of private equity companies TDR Capital and Issa Brothers.
Layton, who is embarking on his second turnaround mission at ASDA after helping to stay away from bankruptcy in the 1990s, said last month he wants to reestablish a price gap of 5-10% with other mainstream UK supermarkets.
Asda said it has already begun to make progress on this and has rebooted its “rollback” pricing strategy and placed in the promotion for up to 12 weeks before it falls below the original price. ASDA has cut prices this year with around 10,000 products. It’s nearly a third of its entire range.
Some content could not be loaded. Please check your internet connection or browser settings.
However, Bernstein analysts have discovered that even after Asda lowered the price, it “has not covered Tesco on a massive scale.” In both Dahl and Woods, he said that tensions from Asda’s £3.8 billion net debt (the supermarket’s financial costs were nearly £440 million in the nine months leading up to September would limit its ability to maintain a price combat with Tesco and efforts to correct availability and scope.
The supermarket relationship with suppliers with limited funds for investment in promotions is also important to win support to cut the price of branded grocery.
Ged Futter, a former ASDA buyer who currently trains suppliers to negotiate with supermarkets, said ASDA’s recent performance has been poor. Suppliers may be afraid that additional sales generated from promotions will not compensate for the margins they sacrificed. “I don’t think that belief is there. The suppliers aren’t given enough great reasons to support them,” Footer said.
However, sources close to ASDA said they have a long-standing positive relationship with suppliers.
Analysts believe that inflationary pressures that put all supermarkets under pressure, primarily due to rising employment costs and future packaging collections, will limit the range of price cuts across the board.
The resulting price reductions will also land in markets where prices are steadily drifting upwards. UK food inflation, which came in at 3% in March, is expected to increase in the coming months due to recent increases in staffing costs and energy bills.
“I don’t think I’ll see prices drop,” RBC’s Dahl said. “If not, I think you’ll just see less inflation than you have.”
Asda said: “We have started since January to mean continuing by lowering the prices of over 10,000 products. This is a long-term commitment with material strategic investments to lower prices for hardworking families.”
