Tesco warns of profit fall as it readies for price war

London — Tesco, Britain’s biggest food retailer, warned on Thursday its profit would likely fall this year as it set aside cash to deal with a step up in the “competitive intensity” of the market, sending its shares down more than 6%.

Last month, Asda, Britain’s third largest grocer, said it would take a hit to profit to finance a major campaign of price cuts aimed at reversing a slide in market share.

Tesco CEO Ken Murphy said its guidance reflected not only Asda’s move but “a general intensification of competition across the board” and was issued from a position of strength.

“Competitors are clearly looking to defend the share gains we’ve been taking,” he told reporters.

“Whatever the competitive environment and whatever comes our way, we’re capable of dealing with it, that’s the message,” he said. Without declaring a full-blown price war, he noted that last week Tesco cut the prices of hundreds of items.

Tesco, whose share of Britain's grocery market has grown this year to nearly 28%, a level not seen since 2016, forecast adjusted operating profit of £2.7bn-£3bn in the year ending February 2026. That compares with a slightly better-than-expected £3.13bn in 2024/25, a 10.6% increase on the previous year.

Before the update, analysts had on average been forecasting a £3.2bn profit for 2025/26.

Shares in Tesco, which had fallen 11% since Asda’s warning last month, were down 6.3%. Rivals Sainsbury’s and Marks & Spencer were down 4.7% and 2.1%, respectively. In contrast, the FTSE-100 index was up 3.8% after the US tariffs pause.

Shore Capital analyst Clive Black said Tesco was “getting the knuckle-duster out”.

“While there is no price war at present, Tesco is giving the market a clear statement that it is up for a fight,” he said.

Most analysts think Tesco’s strategy of matching the prices of discounter Aldi on certain items, together with its Clubcard loyalty scheme, which provides lower prices for members, is working.

The group's sales rose 3.5% to £63.6bn in 2024/25. Fourth quarter UK like-for-like sales rose 4.3%, having been up 3.8% in the third quarter.

Tesco is facing a jump in costs in 2025/26 due to higher social security payments imposed in the Labour government’s first budget last October, a hike in the national minimum wage and a new packaging levy.

To offset a £235m increase in employer national insurance payments and a 5.2% pay rise for store workers costing £180m, Tesco will seek a further £500m of savings in 2025/26.

Finance chief Imran Nawaz said investors should read a further share buyback of £1.45bn and a 13.2% hike in the dividend “as a sign of confidence”.

Reuters