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At 2.05pm on 14 March, Asda issued a press release. Two-and-a-half hours later, the Tesco (LSE:TSCO) share price had fallen 8.7%. Such large movements are unusual for FTSE 100 shares — especially supermarket stocks — which tend to be more stable.
But the negative reaction of investors continued into the next trading day when the share price of Britain’s largest grocer fell another 4.4%.
Asda reported a 3.4% drop in like-for-like (LFL) sales in 2024. However, according to analysts, what appeared to spook investors most about the announcement was the suggestion of a ‘price war’.
The supermarket’s chief executive said the group “will add thousands more products to Rollback at regular intervals during the year as part of its strategic shift to move its entire product range to a new low ‘Asda Price’ by the end of 2026”.
Separately, he was widely quoted as saying: “This is an investment warning, not a profit warning.” It’s all part of the group’s strategy to reduce profitability in the short term with a view to gaining market share over the next couple of years.
Déjà vu
Personally, I don’t know what the fuss is all about. We’ve been here before. The grocery market is one of the most competitive industries around and I don’t think it’s an exaggeration to say that these kinds of stories appear on a monthly basis.
Here are just two examples (and there are more going back decades):
“Supermarket price war leads to fall in grocery inflation” (Sky News, April 2024)
“Who will survive the brutal new supermarket price wars?” (London Evening Standard, January 2025)
One person’s trash is another’s treasure
But the pullback in Tesco’s share price presented an opportunity that I couldn’t refuse. I saw it as a chance to buy a quality stock at a knockdown price. So I did.
And my thought process was a very simple one.
Despite repeated attempts by its rivals — including Lidl and Aldi (the so-called ‘discounters) — to knock it from its number one spot, Tesco continues to dominate the market.
According to the latest figures from Kantar, it has a 28.3% share of the grocery market in Great Britain. And it’s ranged between 26.5%-28.5% over the past five years. This tells me that Tesco has successfully overcome previous threats. Together, J Sainsbury and Asda have 28.3%.
And unlike Asda, the supermarket giant had its “biggest ever” Christmas. Across the group, LFL sales were 3.8% higher. In Central Europe, they were up 4.7%.
But I acknowledge there are risks. Asda has deep pockets – it’s owned by a billionaire family and a private equity firm. And in a sector where margins are wafer thin, even a small loss of market share could have a big impact on earnings.
And to be honest, I suspect Tesco’s share price will remain in the doldrums for a while now. Investors will probably want to see some evidence that it’s business as usual before confidence is restored.
However, until then, I’ll take comfort that the stock’s currently (19 March) yielding 3.9%, a little above the FTSE 100 average. But I accept there are no guarantees when it comes to dividends.
Time will tell whether I’ve made the right decision. But for now at least, I’m pleased to include Tesco in my Stocks and Shares ISA.
