Tesco boss Ken Murphy was adamant last week there was no evidence of an “irrational price battle” between the UK’s supermarket chains. Yet the chief executive of the country’s leading grocer appears to be preparing for one.
Tesco warned that its annual profits would fall by as much as £428mn this 12 months to unencumber the “firepower” needed to chop prices and stay ahead of rivals. While Murphy didn’t mention the aggressor by name, there was little question as to whom he was referring.
Last month, Allan Leighton, who became Asda’s executive chair in November, said the struggling chain was prepared to take a major hit to profits this 12 months with the intention to fund price cuts.
The comments alarmed investors, particularly those outside the UK who thought supermarkets can be a haven in volatile markets and now found themselves staring into a possible price battle. The following sell-off wiped greater than £4bn off the worth of the UK’s listed grocers: Tesco, Sainsbury’s and Marks and Spencer.
A source near Asda said Leighton’s statement “had people rattled”. Meanwhile, an individual acquainted with Murphy’s considering said Tesco’s response was guided by the logic that “if you happen to don’t send a signal, you invite more pressure”.
Murphy, justifying the move to analysts this month, said: “You may’t really afford to blink on this industry — it’s so competitive — and I believe we must always assume that individuals will look to remain competitive.”
Sainsbury’s boss Simon Roberts sees the situation in the same way. On Thursday, the UK’s second-largest supermarket chain said the necessity to cut prices meant it expected profits to flatline this 12 months.
Roberts insisted, nonetheless, that Sainsbury’s had not made any changes “in response to the noise that’s on the market”.
That noise is unsettling investors, nevertheless. Manjari Dhar, consumer analyst at RBC Capital Markets, said there have been fears the industry would descend right into a margin-shredding price battle.
If such a war were to be waged, Tesco looks best placed to manage. The UK’s biggest supermarket chain, with 27.9 per cent market share, made an operating profit margin of 4.6 per cent within the UK and Ireland last 12 months. Sainsbury’s made a margin of three.2 per cent and Asda’s margin last 12 months was below 3 per cent, in accordance with Dhar.
Asda forged its identity as Britain’s most cost-effective supermarket, but its place out there was undermined after the 2008 financial crisis, when German discounters Aldi and Lidl, which sell a tighter range of groceries at lower prices, expanded nationwide. Their growth forced established supermarkets to slash prices to win back shoppers.
The discounters had disrupted “a fat oligopoly of supermarkets that were earning an excessive amount of”, said Bernstein analyst William Woods. But, Woods added, the motive force of price war in 2025 was simply “a distressed supermarket [Asda]” that had pushed prices up too high and was now “attempting to fight against a rather more skilled set of competitors”. An individual near Asda said it didn’t recognise this description of the grocery store, which had set out a transparent turnaround plan.
Asda has been losing market share under the ownership of personal equity firm TDR Capital and the Issa brothers, which acquired the supermarket from Walmart in a £6.8 billion leveraged buyout in 2021.
Leighton, who’s embarking on his second turnaround mission at Asda, after helping steer it away from bankruptcy within the Nineties, said last month he desired to re-establish a price gap of between 5-10 per cent with the UK’s other mainstream supermarkets.
Asda said it had already began to make progress on this, having relaunched its “rollback” pricing strategy, where products are placed on promotion for as much as 12 weeks before settling below the unique price.
Nonetheless, analysts at Bernstein found that even after Asda lowered prices it was “not massively undercutting Tesco”. Each Dhar and Woods said the strain from Asda’s £3.8 billion net debt — the supermarket’s finance costs were almost £440mn within the nine months to September — would limit its ability to sustain a price competition with Tesco in addition to its efforts to repair availability and ranges.
Supermarkets’ relationships with suppliers, who’ve limited funds to speculate in promotions, will even be crucial to winning their backing for price cuts on branded groceries.
Ged Futter, a former buyer for Asda who now trains suppliers to barter with supermarkets, said Asda’s poor recent performance meant it will struggle to realize their support. Suppliers might fear the extra sales they generated from the promotions wouldn’t compensate for the margin they sacrificed. “I don’t think the assumption is there. Suppliers haven’t been given a sufficiently big reason to back them,” Futter said.
A source near Asda, nonetheless, said it had long-standing positive relationships with suppliers.
Analysts imagine the inflationary pressures squeezing all supermarkets, mainly from rising employment costs and a forthcoming packaging levy, will cap the extent of the value cutting across the board.
The value reductions that do materialise will even land in a market where prices are steadily drifting upwards. UK food inflation, which got here in at 3 per cent in March, is anticipated to rise in the approaching months due to recent increases in staffing costs and energy bills.
“I actually don’t think you’ll see prices happening,” said RBC’s Dhar. “I believe you’ll just see less inflation than you otherwise would have.”
Asda said: “Now we have began as we mean to go on by reducing the costs of over 10,000 products . . . since January. This can be a long-term commitment with a fabric strategic investment to lower prices for hard-working families.”
