Last month, Asda, the country's third-largest food chain, opened hostilities by announcing that lower margins would fund a campaign of price cuts, with the aim of regaining lost ground in the market. The strategy prompted Tesco to react last week by lowering its adjusted operating profit forecast for 2025/26 to £500m below analysts' expectations. This reversal led to a 6% fall in Tesco shares and a 3% fall in Sainsbury's shares. Previously owned by Walmart, Asda is not listed.
Tesco's chief executive Ken Murphy sought to reassure: "Whatever the competitive environment and whatever happens, we're capable of dealing with it."
Sainsbury's, which has a 15% share of the UK grocery market, initially issued a forecast of operating profit of £1bn for 2024/25, up 7%. It remains to be seen whether the retailer will adopt a more cautious stance, like Tesco.
For Bernstein analyst William Woods the current situation is reminiscent of an old western: "Every retailer is gradually turning up the heat, drawing their gun, taking aim and waiting to see who, if anyone, starts shooting." Nevertheless, he points out that despite a hardening of competitive positions, we can't yet speak of an irrational price war - and he doesn't expect it to materialise in the near future.
Sainsbury's generates around 25% of its sales from non-food products - compared with just 7% for Tesco. Sainsbury's has managed to gain market share in recent years, notably by bringing its prices into line with those of discounter Aldi for certain key products and by offering preferential rates to holders of its Nectar loyalty card, an initiative funded by cost reductions.
