It normally takes something big to knock 13% off Tesco’s share price – a profits warning, say, or a 2014-vintage accounting scandal. This is the UK’s largest supermarket chain by a distance, after all, and a business that runs on rails now that it has sold most of its foreign adventures to concentrate on the day job.
Yet 13% is the fall in Tesco’s shares since last Friday when Asda said, in effect, it has had enough of being the industry’s punchbag and will try to regain lost market share by cutting prices. Sainsbury’s shares are also off 8% in the same short period, and even Marks & Spencer’s, down 6%, have been caught by investors’ worries about a price war.
Before shoppers mentally chalk up the savings in their grocery baskets, however, it’s worth asking if the stock market may be overreacting.
Asda definitely needs to do something. The business underperformed for years under Walmart’s ownership. Then the Issa brothers, Mohsin and Zuber, and TDR, their private equity backers, loaded it with buyout debt in 2021 and investment suffered again. Asda’s market share has declined from 15.1% to 12.6% over the past five years, according to the research group Kantar’s numbers.
Nor should one doubt the credentials of Allan Leighton, the new Asda chair. He was part of the team that hauled the business off the floor in the 1990s and the new plan is very like the old one: fix the basics, such as having enough staff in stores, and then concentrate on creating a bigger price gap with the main rivals. “The only way we have got to rebuild profit is through sales growth,” he says.
It’s just that there are several reasons to think the scrap may not turn into what City analysts, with their eyes fixed on share prices, call an “irrational” price war in which all participants lose in the form of lower profit margins.
First, how much is Asda planning to throw at the struggle? Leighton didn’t say. Rather, he said there would “material reduction in our profit” this year. But there would probably be a reduction anyway because of higher employment costs, the packaging tax and other costs that all supermarkets have been grumbling about. The exclusively price-lowering element is unclear.
Second, is the real ambition to regain all the lost market share, or just a bit of it? “It is far from sure that a meaningful programme of investment will not require an equity injection,” noted the Jefferies analyst Frederick Wild. Are TDR and the remaining Issa brother (Mohsin) up for injecting more cash? Maybe they are. But merely stopping the rot and stabilising trading trends may be all they require to trim borrowings and make their buyout arithmetic work.
Third, the supermarket game has changed since the 1990s. Aldi and Lidl are bigger forces in the land. Tesco and Sainsbury’s have better data-driven loyalty programmes in their armoury. From the point of view of Asda’s owners, launching – and, critically, then sustaining – a full-on price war against competitors with stronger balance sheets sounds a risky strategy.
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Leighton should certainly be able to run Asda more efficiently and sharpen the prices. The performance could hardly be worse – his predecessor, Stuart Rose, said he was “embarrassed”. The enormous £800m IT overhaul, to get off Walmart’s systems, should help. But the Barclays analyst James Anstead probably offers a fair assessment: “A more dynamic Asda is unhelpful for sentiment, but we question the inevitability of a UK price war.”
In the meantime, as he notes, Tesco and Sainsbury’s are oozing cash. The former is predicted to return £4bn of its £22bn stock market value via dividends and share buy-backs in the next two years. At Sainsbury’s, it’s £1.36bn out of £5.5bn. Shareholders should worry if chunks of those distributions are diverted into fighting a reviving Asda. But we’re not there yet, and may never be.
