Tesco has warned that the UK grocery sector faces an intensifying price battle in the run-up to Christmas, even as it raised its full-year profit forecast after winning market share over the summer.
The UK’s largest supermarket group now expects to deliver annual profits of up to £3.1bn, £100m higher than previous guidance, after its decision to cut prices on 6,500 products by an average of 9% drew in more customers. Tesco said its grocery inflation was running “well behind” the latest industry rate of 4.9%, according to figures from Worldpanel.
Tesco chief executive Ken Murphy acknowledged that rivals had already signalled their intention to compete aggressively on pricing. Earlier this year, Asda pledged to deploy a “significant war chest” to drive down costs.
“Some of our competitors went pretty strong on their statement of intent at the start of the year and have acted on that. It doesn’t feel that rational. We are anticipating the second half could be more intensive, not less,” Murphy said.
He added that Tesco would be “pulsing in strong deals” over the next three months but warned that shoppers were already showing signs of nervousness ahead of the November budget.
Tesco reported a 5.1% rise in group sales to £33bn in the six months to 23 August, with UK like-for-like sales up 4.9%. Trading was boosted by the warm summer, which lifted sales of barbecue foods, and by a shift in consumer behaviour, with customers buying more premium ready meals and fresh produce to cook at home rather than eating out.
Pre-tax profits fell 6.3% to £1.3bn, reflecting restructuring charges, the separation of Tesco’s banking division, and its investments in price reductions.
The retailer said it had offset some of the financial pressures through efficiency savings and AI-driven forecasting, using technology to better predict demand, cut waste, and optimise staffing.
But Murphy criticised government policy on business taxation, pointing to £235m in higher employer national insurance contributions and £90m from a new packaging levy this year.
“Enough is enough,” he said, calling on ministers to exclude retailers from higher business rates on larger premises and to deliver on promises of a fairer system.
Despite the warnings of a looming supermarket price war, Tesco remains confident heading into the festive period, where it expects strong consumer demand for value-driven deals.
With household budgets under strain and competitive intensity building, Murphy insisted Tesco would continue to focus on delivering the best value for shoppers while protecting long-term profitability.
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Tesco warns of Christmas price war as household budgets tighten