Tesco prepares for war – cost cuts £500 million
British grocery stocks continue to trade weakly on the London Stock Exchange after Asda announced it intends to cut prices across the board to attract more customers.
Tesco shares lost 4.3 percent in the wake of the move. Marks & Spencer and Sainsbury have also lost heavily on the news from Asda[i]
Tesco (TSCO.L) signalled last week that a price war among UK supermarkets is mounting, as its CEO pointed to an intensification of competition across the sector and targeted as much as £500 million in fresh cost cuts.
Chief executive Ken Murphy says the company is facing mounting pressure to slash prices, after competitor Asda recently promised the company’s biggest price cuts in 25 years. Tesco states it expects to make as much as £400 million less in profit next year as a result of what Mr Murphy calls “a very competitive market”, according to Reuters, a news agency.
“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,” argues CEO Ken Murphy who has managed Tesco since 2020.
The grocery giant says it expects to see adjusted operating profit between £2.7 billion and £3.0 billion, compared with £3.1 billion in the most recent fiscal year. The guidance “gives us flexibility and firepower” to respond to mounting competition among supermarkets, Mr Murphy argues.
Britain’s major grocery chains have been engaged in the first 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. Hence Tesco is looking to cut a further £500 million from its overheads to help offset new operating cost inflation.
Automation
The company says that about £510 million in cost cuts last year came from bringing in more automation in warehouses and improving supply chains. That will continue together with pretty massive job cuts.
Nonetheless, Tesco also reported particularly good development in sales for the most recent fiscal year, up 3.5% to £63.6 billion. And the supermarket said it increased its market share across the UK to 28.3%, its highest point since 2016.
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.
Most analysts think Tesco's strategy of matching the prices of discounter Aldi on key items, together with its Clubcard loyalty scheme, which provides lower prices for members, is working.
However, In the early 1980s, Tesco was a school example of profitability, growth, and store development, with investments and ambitions in virtually every continent on the globe!
By the end of the 90s luck turned. CEO Terry Leahy could no longer turn “everything into gold.” He lost big money in US, in East Europe and in the home market to Lidl and Aldi and was ousted in March 2010.
Over the last ten years, the overall value development of the shares has been a very modest; 3 per cent share value increase in ten years! No shareholders can be happy with that. Ken Murphy is probably sitting loosely in the Tesco saddle.
Tesco Key insights
- Market share UK: 27,9%
- Number of stores in UK & Ireland: 4,273
- Number of stores worldwide: 4,942[ii]
(Statista June 2024)
Sources: Reuters, Tesco, Nordnet, Statista, NHH Food.