Tesco Faces Tough Competition Sparks Cost Cutting Strategy

The boss of Tesco has issued a stark warning regarding an escalating price war among UK supermarkets, forcing the country’s largest grocer to implement significant cost-cutting measures and revise its profit forecasts for the year. Following recent pledges from competitors, including Asda, to significantly slash prices, Tesco’s shares fell by 6 per cent as Chief Executive Ken Murphy expressed the necessity for a proactive response to intense market competition.

Murphy highlighted that the competitive landscape is pushing Tesco to target £500 million in new savings, aimed at maintaining its market position. He noted that the rapidly changing dynamics in the retail sector, especially following Asda’s announcement of its largest price reductions in 25 years, require Tesco to reassess its strategies to ensure customer loyalty and retention.

Despite the cuts, Tesco pointed out that it could face a potential decline of up to £400 million in profits this financial year. The adjusted operating profit range is now projected to be between £2.7 billion and £3 billion, a decrease from the £3.1 billion reported in the previous financial year.

As an immediate response, Tesco is accelerating its internal cost-cutting programme, a move prompted by rising operational costs and recent changes in government taxation, such as increased national insurance contributions. The grocer anticipates an additional annual expense of £235 million due to these changes, alongside impending wage increases.

In the past year, Tesco achieved substantial savings of £510 million by enhancing automation across its supply chain. Further efforts will continue in this direction to ensure the company remains competitive without compromising its service level.

Murphy also acknowledged concerns regarding smaller businesses within Tesco’s supply chain, stating that current economic pressures could significantly impact their operations. He suggested reforms in business rates to adapt to changes in the retail environment, particularly the shift towards online shopping.

Tesco’s diverse product range and robust supplier relationships continue to position it favourably in the market. The company’s market share increased from 27.3 per cent to 27.9 per cent over the last year, indicating its ongoing ability to adapt despite fierce competition.

While investors may be wary of cautious guidance amidst strong sales, Tesco maintains a solid balance sheet, as further share buybacks and dividends are being proposed. The latest share buyback announcement of £1.45 billion will be completed by April 2026, in addition to a proposed 13.3 per cent year-on-year increase in dividends.