A surprise announcement from Asda has caught investors off guard and threatened to spark a supermarket price war. Its UK rivals were knocked off their axis by the profit warning and a statement it intends to invest more in price and store standards this year.

Executive chair Allan Leighton said the chief aim behind Asda’s move was to restore the supermarket’s 5% to 10% price gap ‘which had closed to flattish post its 2021 acquisition’.

Leighton added that these actions will materially reduce Asda profitability in 2025, from a 2024 adjusted EBITDA (earnings before interest taxation depreciation amortisation) (including rents) of £1.14 billion.

Asda’s news sent other supermarket stocks tumbling on the day (14 March) with Tesco (TSCO) falling 10%, Sainsbury’s (SBRY) 8% and Marks & Spencer (MKS) 7%. They followed up these declines with further losses on 17 March.

‘Clearly, market conditions are changing rapidly. It remains far from clear whether Asda has the ability to commit to the scale of cuts outlined if volume growth does not improve measurably in the coming weeks and months. Until this evidence arrives, we expect sector valuations to remain pressured,’ said analysts at Jefferies.

Shore Capital retail guru Clive Black says: ‘From a direct commercial impact in terms of store adjacencies and so customer switching it would, to us, be the likes of B&M (BME), Iceland and Morrisons that would be most impacted whilst just because of its scale, Tesco may notice some ripples too.

‘Whilst no one is immune to the chess moves of others, Marks & Spencer, Sainsbury’s, and Waitrose would singularly appear less exposed we contend, as would Aldi and Lidl with their stronger private label assortments.

‘The danger, of course, as we see with tariffs, is contagion. So, what does Asda do and does this lead to secondary movements on pricing and promotions that threatens the rationality of the market and so the gross margin environment.

‘On this important matter, we simply have to wait and see but we do point out that Tesco and Sainsbury’s have much stronger value propositions in 2025 compared to days gone-by, augmented by powerful proprietary loyalty programmes, better assortments, meaningful price matching to Aldi, and much stronger execution capability than Asda at this time.’ 

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