Tesco braces for grocery price war with rivals

Tesco has said it expects to make lower profits this year as it faces a potential price war with the UK's other major supermarkets.

The British retail giant said profits could be up to £400m lower if it is forced to reduce the cost of groceries after rival Asda recently announced big price cuts to try to restore its fortunes.

Tesco's chief executive Ken Murphy said that there had been an "intensification" of competition across the industry.

A price war could benefit many households struggling with the cost of living, especially after a number of bills increased in April.

"Any pressure on grocers to lower prices will be welcomed by shoppers, even if it adds further pressure on retailers who are navigating rising costs across their operations," said Nick Carroll, director of retail insights at Mintel, a market research firm.

Tesco said operating profits would likely be between £2.7bn and £3bn, below what it made for the last financial year and lower than the £3.2bn forecast by analysts.

Mr Murphy said guiding down the profit expectations will give Tesco the "flexibility and the fire power to maintain our position in the market".

The company said: "We see further opportunities to protect and strengthen our competitiveness."

Several supermarkets saw share prices fall on Thursday. Tesco's dropped by 6% while rival Sainsbury's fell 4.8% and Marks & Spencer traded 2.6% lower.

Last month, Asda's executive chairman Allen Leighton said the supermarket would aiming for its prices to be 5% to 10% cheaper than its rivals in the future in an attempt to win back customers.

Lucy Rumbold, equity research analyst at Quilter Cheviot, said: "We don't see Asda's recent pricing reset as something Tesco will worry about, with it likely to have little material impact on its profitability."

But Richard Lim, chief executive of Retail Economics, said there were "certainly signals in the market" that a price war is in the offing.

He said supermarkets had engaged in these battles in previous years. "And we live in an incredibly competitive sector when it comes to the grocery sector so price and value is always that key determinant that drives consumers through the doors of the supermarkets," he told the BBC's Today programme.

Tesco, like its competitors, is facing increased costs due to rises in employer National Insurance Contributions (NICs) and minimum wages. The company said its bill had risen by £235m.

Mr Murphy said despite fears of US tariffs stoking inflation, he did not think the impact would be "significant for Tesco", stating that the supermarket gets a large amount of its products from the UK.

He made the comments as Tesco announced a 4% rise in full-year sales to £63.6bn for the 12 months to 22 February.

Pre-tax profit fell by 3.2% to £2.2bn while like-for-like sales grew by 3.1%.