Tesco: Supermarket giant predicts lower profit as price war intensifies

Tesco said it expects to make as much as £400m less in profit next year as a result of what Mr Murphy called “a very competitive market”.

The company said in a statement: “In the last few months, we have seen a further increase in the competitive intensity of the UK market.

“We are committed to ensuring that customers get the best value in the market by shopping at Tesco and we see further opportunities to protect and strengthen our competitiveness.”

The grocery giant said it expects to see adjusted operating profit of between £2.7bn and £3.0bn, compared with £3.1bn in the most recent financial year.

The guidance “gives us flexibility and firepower” to respond to mounting competition among supermarkets, Mr Murphy said.

Britain’s major grocery chains have been engaged in the early stages of a price war that has already wiped billions off their share prices.

It comes after comments by Asda chairman Allan Leighton, who in March promised sweeping price cuts in a bid to make it more competitive.

Tesco also said it is looking to cut a further £500m from its overheads to “help offset new operating cost inflation”, partly as a result of recent tax hikes for employers brought in by the Government.

The company warned of price rises and inflation as a result of an increase in employer national insurance contributions (Nics) late last year.

The company said that about £510m in cost cuts last year had come from bringing in more automation in warehouses and improving supply chains, among other measures, and that it would continue with the same savings plan this year.

When asked if the savings drive could mean cutting jobs, Mr Murphy said: “We never rule that out, but at the same time, we have a track record of managing it very well.”

In January, it announced 400 job cuts across both stores and head office as part of plans to “simplify” the business.

Nonetheless, Tesco also reported bumper sales for the most recent financial year, up 3.5 per cent to £63.6bn.

And the supermarket said it increased its market share across the UK to 28.3 per cent, its highest point since 2016.

Mr Murphy added: “Despite inflationary headwinds, we are committed to ensuring customers get the best possible value by shopping at Tesco, and see further opportunities to strengthen our competitiveness.”

Julie Palmer, a partner at consultant Begbies Traynor, said Tesco’s cautious profit guidance is “a stark reminder” of the competition facing supermarkets.

“Clearly, no retailer is immune from the turbulence of today’s economy,” she added.

Richard Hunter, Head of Markets at interactive investor, commented: “Tesco still rules the roost in the British aisles, putting further light between the group and its nearest rivals, even though its dominant grocery position may be tested over the coming year.”

"Supermarkets may be about to embark on a trade war of their own, and Asda’s aggressive assault on prices, if it fully happens, will likely shave profits across the sector.