The European market posted a sharp gain on Thursday, after US President Donald Trump abruptly delayed a new tariff round on dozens countries including the European Union.
FTSE 100 soared by over 4%, marking its largest daily gain for months.
The soaring mood of the London blue-chip index has been tempered, however, by sharp declines in supermarket stocks.
Tesco’s and Sainsbury’s were the biggest losers of the day, as mounting worries about a price war intensifying in the sector weighed them down.
Tesco warns about intense competition, falling profits and Tesco
Tesco’s shares fell by 24.4p or 7% to 310.8p. This is their lowest point since July. The retailer warned that profit would most likely be down this year, as they prepare for a more competitive market.
Company forecasts operating profit between PS2.7 billion to PS3 billion in the current financial period, which is well below expectations from City of about PS3.2 billion.
The largest British grocer has said that it is preparing itself for a “heated” competition environment, and plans to remain flexible to protect its market share.
Ken Murphy, Tesco’s chief executive officer, highlighted the company’s commitment to investing in shoppers’ value despite inflationary pressures.
In its latest outlook, the company stated that “in the past few months we’ve seen an increase in competitiveness on the UK market”.
We are able to react to market conditions with flexibility.
Tesco’s warning also caused shares of rival Sainsbury’s to fall by 12p or 5%.
Asda’s aggressive discounts add to the pressure
Asda’s renewed price-cutting campaign, spearheaded by Allan Leighton as chairman, has fueled fears of a price war.
The aggressive pricing, designed to fend off discount chain Aldi, and Lidl’s rapid advancement, raises the stakes.
Richard Hunter, Interactive Investor’s head of markets said: “Supermarkets could be on the verge of a new trade war.” ”
If Asda is successful in its aggressive pricing, it will reduce profits for the entire sector.
Hunter pointed out that Tesco’s shares fell by 10 percent this year, even before the trading on Thursday. This was due to growing expectations as well as an unsettling economic climate. He warned that the headwinds would continue.
Tesco has reported that despite the difficulties, its adjusted operating profit for the last financial year rose 10.6% to PS3.128 Billion, while group sales grew 3.5%, to PS63.64 Billion.
Its market share also rose to 28,3% in the UK, which is its highest since 2016.
Tesco has stated that it will be aiming to save around PS500,000,000 in order to cover rising costs, which includes an increase of PS235,000,000 for National Insurance Contributions.
Analysts still say Tesco is well-positioned despite the risks
Analysts have suggested that Tesco is well-positioned to survive the current storm, despite the nervous reaction of investors to the cautious outlook.
Aarin C. Chiekrie is an equity analyst with Hargreaves Lansdown. She said . “Fears that a price battle could squeeze profits have been weighing on the sentiment in recent months, but they’ve not materialised.”
Tesco believes that even if there is a price battle, it will still be in the best position for years. The Aldi match price and Clubcard pricing keep customers loyal. Asda does not appear to be able to change this dynamic, despite the recent headlines.
Hunter echoed this opinion, saying: “The next battle will be won by Tesco rather than Asda.” It is still the case that Tesco’s share of market has increased to 28,3%. This is equal to its closest rivals Sainsbury, and Asda combined.
The ICD published this article: Price war keeps Tesco and Sainsbury’s out of FTSE gains, but analysts support Tesco
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