Tesco braces for grocery price war with rivals

Tesco has said it expects to make lower profits this year amid a potential price war among the UK's major supermarkets.

The UK's biggest grocer has forecast profits of between £2.7bn and £3bn compared with the £3.1bn it made for the financial year that has just ended.

Chief executive Ken Murphy said the lower profit prediction would give Tesco the "flexibility and the fire power to maintain our position in the market" due to the increased competition.

The company's share price plunged last month after Asda launched big price cuts to try to restore its fortunes.

Tesco said it was more competitive on price than ever but that in the last few months it had seen a "further increase in the competitive intensity of the UK market".

Several supermarkets saw share prices fall on Thursday.

Tesco shares fell 6% while rival Sainsbury's fell 4.8% and Marks & Spencer dropped 2.6%.

Prior to Tesco's results update on Thursday, analysts had been forecasting profits of £3.2bn on average.

The supermarket said it was committed to giving customers the best value.

"We see further opportunities to protect and strengthen our competitiveness," it said.

Analysts have previously doubted whether Asda's price cut move would spark a price war.

Lucy Rumbold, equity research analyst at Quilter Cheviot, said on Thursday: "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."

Ms Rumbold said although the group was responding with higher promotions, "robust supplier ties which helps it negotiate better deals" and data analytics that enable Tesco "to better tailor its pricing strategy" should mean Asda's impact won't be that significant.

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 NI 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.