Tesco slashing £500m of costs as price war escalates

Tesco is expecting profits to fall this year following an increase in the “competitive intensity” of the market in the past few months.

Britain’s biggest supermarket said it was expecting full-year profit to land between £2.7bn and £3bn next year, down from £3.1bn in the 12-month period to 22 February 2025 (a 10.6% rise on the previous 12 months). Analysts had previously forecast profit to be around £3.2bn for the coming year.

In its annual results this morning, Tesco said the lower guidance reflected the need for “flexibility and firepower…to respond to current market conditions”.

It comes after Asda kicked off a price war in March, with new boss Allan Leighton making clear the supermarket was prepared to “throw a tonne of a cash” at regaining lost shoppers. Tesco’s share price consequently fell 12% amid fears it would hurt profits. 

”The announcement we’re making today is from a position of strength and what we’re saying is that whatever the competitive environment and whatever comes our way, we’re capable of dealing with it,” said CEO Ken Murphy.

Its share price was down around 5% this morning following the announcement.

While analysts have previously doubted a price war will actually happen, Tesco is “getting the knuckle-duster out…[and] giving the market a clear statement that it is up for a fight,” said Shore Capital analyst Clive Black.

Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said even if a price war does materialise, “Tesco reckons it’s in the most competitive position it’s been in for many years, helped by the Aldi price match and Clubcard prices keeping customers loyal.”

“Asda doesn’t appear to have the financial firepower to disrupt this dynamic.”

Tesco’s pre-tax profit fell 3.2% to £2.2bn last year, with group sales rising 3.5% to £63.6bn. Growth in core retail sales offset a 6.3% decline in fuel. Booker’s sales fell 1.8% due to a decline in tobacco sales and lower Best Food Logistics volumes.

Tesco said the rise in National Insurance contributions would cost it an extra £235m this year and was seeking £500m in cost savings across the business to help fund it. Its cost-cutting mission has already delivered £510m in the past 12 months that helped offset inflation and pay rises. 

In the UK, like-for-like food sales were up 4.9%, with Tesco attributing this to its investment in product quality and innovation. 

Murphy said the supermarket had launched over 1,600 new or improved products this year, including Taste Discoveries dinner-for-tonight range and health-led high protein and Gut Sense ranges. Its Finest range also launched 400 new products, helping sales grow 15% to £2.5bn.

Tesco announced its latest share buyback plan, worth £1.5bn, which will be completed by April next year. Around £700m of this will be funded by the sale of its banking operations. It completed its last round of share buybacks in April to bring the total to £2.8bn since October 2021.

John Moore, senior investment manager at RBC Brewin Dolphin, said it is “another set of strong results across the board for Tesco.”

“A further share buyback and double-digit increase to this year’s dividend suggest management is confident of navigating the challenges that may lie ahead. With a solid balance sheet, clear strategy, and coherent proposition, Tesco is in as good a position as it can be to do so.”