Tesco prepares for a price war with rival Asda in supermarkets

Tesco, the largest grocery store in Britain, has decided to lower its prices faster in order to keep Asda from gaining market share

As the industry becomes "very competitive," the CEO of Tesco has warned of a "mounting price war among UK supermarkets," according to Isabella Fish in The Times. In addition to reducing its profit forecast by up to 400 million for the year, from 3 billion to between 2 and 7 billion, the nation's biggest grocery store is planning to "double down on cost cuts." This action follows Asda's recent promise to "deliver its biggest round of price cuts in a quarter-century," which has already caused competitors' market values to drop by billions.

According to Hannah Boland in The Telegraph, it's no surprise that Asda has chosen to lower prices. It must take action to "stop the rot." In just the last four years, its market share has decreased from 14point 8 percent to 12point 6 percent, and overall sales have been "slipping." For a business that is "lumbering" under a 3.8 billion debt pile after being acquired by private equity firm TDR Capital for 6.8 billion in 2021, this is an "existential" issue. In light of this, it appears that the price reductions are an effort to revert to the "tried and tested strategy" that was credited with "fuelling a major upswing at Asda in the 1990s."

Can Tesco compete with its competitors?

That Asda's move to try to regain some market share by cutting prices has "spooked" rivals like Tesco, who are now "running scared," is good news, according to James Moore in The Independent. Ultimately, it is understandable that investors are now experiencing some pressure, considering that Tesco has been "lining its pockets with gold" by spending 864 million on dividends and an additional 1 billion on share buybacks. "It is about time the scales tipped back" in favor of the latter, as these figures "tell you all you need to know" about who has been winning the "battle" between retailers and their customers.

According to Ian King on Sky News, while price reductions may be "good news" for customers, it's crucial to remember that they represent a threat to Tesco. Both Tesco and Sainsbury's are "better placed than anyone else to withstand one" but also have the "most to lose" from an Asda turnaround. With "data and insights no one else has, enabling it to react fast to changes in the market or to shoppers habits," Tesco's Clubcard is likely the most successful supermarket loyalty and rewards program in the world.

Alex Brummer of the Daily Mail claims that Tesco has demonstrated in the past that it is able to match competitors on price, including the German "interloper" Aldi. However, investors in Tesco aren't just "arent terribly happy" about the possibility of a price war between the big supermarkets that could hurt profits. Aside from the 235 million hit to income from the national insurance increase and the "still to be felt" effects of the Employment Rights Bill, its share price is also suffering from concerns that consumer confidence is eroding. However, the industry as a whole is less susceptible than most people believe: "even in recession people want to eat well."