Tesco vs Sainsbury's vs Asda: Who Is Winning the UK Price War?

The longer story is the discounters. Aldi and Lidl together held 8.4% of the market twelve years ago and 19.3% in the latest data. Asda's share fell from 14.1% six years ago to 11.5%, and Morrisons' from 10.2% to 8.4%. Tesco and Sainsbury's held on. Asda's price push is really a fight to stop that slide.

How the price war unfolded

1. 5 yrs agoAsda bought with debt£6.8bn deal by the Issa brothers and TDR Capital
2. 2 yrs agoLeighton returnsTakes charge 25 years after he first ran Asda
3. Last springAsda declares warDeepest price cuts in 25 years; Tesco cuts guidance
4. A year agoArgos talks collapseJD.com demands revised terms
5. This summerArgos soldTo Swift Partners for at least £120m
6. RecentlyAsda grows againFirst 12-week sales growth in about two and a half years

Who is winning the UK grocery market share battle?

Worldpanel by Numerator (formerly Kantar) tracks what a panel of households buy, and its four-weekly market-share release is the scoreboard the City watches. In the latest 12 weeks, according to Reuters' write-up of the data, Tesco held 27.8% of the market, down 0.3 points from a year earlier. Its share has now edged lower in four straight reports. Sainsbury's was flat at 15.2%, and Asda slipped 0.3 points to 11.5%.

Tesco still sells almost as much as Sainsbury's and Asda combined

Tesco27.8%

Sainsbury's15.2%

Asda11.5%

Aldi10.6%

Lidl8.7%

Morrisons8.4%

Co-op5.5%

Waitrose4.5%

Iceland2.3%

Ocado2.2%

Share of GB grocery spending, latest 12 weeks. M&S is not fully included in the data set. Source: Worldpanel by Numerator via Reuters.

The winners are at the edges. Lidl's sales grew 8.0% and its share rose 0.4 points to 8.7%; in the spring it overtook Morrisons to become Britain's fifth-largest grocer. Online grocer Ocado grew 13.3%. M&S, which Worldpanel does not fully count, grew grocery sales 14.8%. Aldi, the discounter everyone used to fear, grew just 0.7% and lost share.

Asda and Morrisons lost the most ground in six years

6 yrs agoNow

51015202530%0

26.6%27.8%

Tesco6 yrs ago26.6%Now27.8%

14.9%15.2%

Sainsbury's6 yrs ago14.9%Now15.2%

14.1%11.5%

Asda6 yrs ago14.1%Now11.5%

10.2%8.4%

Morrisons6 yrs ago10.2%Now8.4%

13.7%19.3%

Aldi + Lidl6 yrs ago13.7%Now19.3%

TescoSainsbury'sAsdaMorrisonsAldi + Lidl

One caution about these numbers. Tesco reports its own market-share measure, which reached 28.5% for its last financial year, the highest in more than a decade. Worldpanel's panel and Tesco's measure don't always agree, and a 0.3-point move is small. The trend that matters is clear, though: Tesco and Sainsbury's have kept their customers while Asda has not yet won its own back.

What is Asda trying to do, and is it working?

Asda was bought five years ago by the Issa brothers and private equity firm TDR Capital for £6.8bn, funded heavily with debt, a leveraged buyout. Walmart kept a 10% stake. Sales sagged under the new owners, and two years ago Leighton, who had run Asda a quarter of a century earlier, came back as executive chairman.

His plan is simple: be 5% to 10% cheaper than the traditional big four rivals (Tesco, Sainsbury's, Asda itself and Morrisons) and win shoppers back through "Rollback" price cuts. According to The Grocer, Leighton said Asda had opened a 4% to 7% price gap, short of the target, and that a "large slug" of the fall in earnings came from price investment that had "always" been planned.

Make a guess

Asda spent last year cutting prices and moving its IT off Walmart's systems. How much did its adjusted EBITDA fall?

Tap your guess

0–10%Your guess10–20%Your guess20–30%Your guess30–40%Your guess

01234567890123456789.0123456789%Fall in adjusted EBITDA, last year

Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 33.1%.

Adjusted EBITDA fell 33.1%, to about £764m. Sales excluding fuel fell 3.3% to £21bn, and the pre-tax loss widened to £989m.

The cost was steep. Last year Asda's sales excluding fuel fell 3.3% to £21bn, and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation, a rough measure of operating cash) fell by about a third to £764m. A botched move off Walmart's computer systems, which Leighton called "self-inflicted", emptied shelves and knocked online shopping offline. The Grocer reports that the pre-tax loss widened to £989m from £599m, after £656m of one-off costs, including a £344m property write-down.

Asda's balance sheet buys it time, not unlimited firepower

£3.1bnNet debt, after a £500m cut

£2.1bnTotal liquidity

£989mPre-tax loss last year

Is it working? Slowly. In Asda's latest quarter, like-for-like sales fell 2.3%, but sales in the first seven weeks of the current quarter rose 0.2%, its first growth in two years. Worldpanel shows Asda's 12-week sales up 0.1%, its first growth in about two and a half years. Leighton says the turnaround will take three to five years and that Asda is "still in the foothills of recovery".

That matters for Tesco and Sainsbury's investors. Asda carries £3.1bn of net debt, and private equity owners can't fund losses forever. Asda can keep prices sharp, but it can't afford a scorched-earth war, and so far it has not taken enough customers to force one.

How did Tesco and Sainsbury's respond?

Neither matched Asda price for price across the store. Both used two cheaper weapons: loyalty-card pricing and Aldi Price Match. A loyalty price is a lower shelf price available only to members of the store's card scheme: Clubcard at Tesco, Nectar at Sainsbury's. Aldi Price Match promises to match Aldi on a set list of staples, which takes away the discounter's main argument without cutting prices across the whole store.

According to its full-year results, Tesco ran more than 10,000 Clubcard Prices and over 600 Aldi Price Match lines last financial year. It tripled its "Everyday Low Prices" range from 1,000 to 3,000 lines, and more than 10,000 products ended the year cheaper than they started, by 9.5% on average. In the spring it launched "Your Clubcard Prices", which tailors offers to each shopper.

Sainsbury's says Nectar Prices has saved customers more than £5.5bn since its launch three years ago, with an average saving of £15.50 on a weekly shop of £80 or more, and more than 10,000 Nectar offers each week. It calls its Aldi Price Match "the biggest in the market".

Tesco and Sainsbury's fought with loyalty prices, not blanket cuts

Tesco

• 10,000+ Clubcard Prices
• 600+ Aldi Price Match lines
• Everyday Low Prices tripled to 3,000 lines
• Your Clubcard Prices: personalised offers

Sainsbury's

• 10,000+ Nectar Prices offers a week
• £5.5bn+ saved since launch
• Biggest Aldi Price Match, by its count
• Your Nectar Prices at every checkout

Asda

• Rollback price cuts
• Aiming for a 5–10% price gap
• Gap reached 4–7%

Loyalty pricing does two jobs. It gives a visible discount to the customers worth keeping, and it hands the grocer data on who buys what, which Tesco sells to suppliers as advertising. Skeptics say the "regular" price is inflated to make the member price look good. The competition regulator checked.

Two years ago, the CMA's review found that 92% of loyalty prices were genuine savings, typically 17% to 25% off. The catch for investors is that the savings are real. Loyalty prices are a lasting cost, not a marketing trick.

What did the price war do to profits and guidance?

Tesco's profit warning last spring guided to £2.7bn to £3.0bn of adjusted operating profit (profit from trading, before interest and tax and excluding one-offs), against £3.128bn the year before. The City had expected about £3.2bn. Tesco raised the range to £2.9bn to £3.1bn at the half-year and then delivered £3.152bn, slightly up on the year. The feared collapse never came.

Tesco guided for a profit drop, then beat its own range

First guidance£2.70–£3.00bn

Raised guidance£2.90–£3.10bn

This year's guidance£3.00–£3.30bn

Year before£3.13bn

Delivered£3.15bn

£2.6£2.8£3.0£3.2£3.4bn

The margin still slipped. Tesco's group adjusted operating margin fell 12 basis points (hundredths of a percentage point) to 4.3%, and its UK and Ireland margin fell 15 basis points to 4.7%. For this financial year Tesco guides to £3.0bn to £3.3bn, a wider range than it had planned because of the war in the Middle East and its effect on household budgets. In the first quarter, UK like-for-like sales (sales from stores open in both years) grew only 1.8%, against a strong year-earlier period.

Sainsbury's is more exposed. Its retail underlying operating profit fell 1.1% to £1,025m last financial year even though grocery sales rose 5.2% to £24.3bn and its volume share hit a ten-year high. For this year it guides to £975m to £1,075m of total underlying operating profit. The shares fell 5.21% on results day.

Find the cause

Sainsbury's grocery sales rose 5.2% and its volume share hit a ten-year high, yet retail profit fell. Which line explains it?

Sainsbury's, last financial year

Argos profits were broadly in line with last year Rather than pass through the full extent of cost inflation, we invested to sustain the strength of our competitive position Food volume growth ahead of the market for the sixth consecutive year Retail free cash flow rose 8.1%

Tap the phrase you think is the tell.

Spotted it.Not that phrase. Retail operating margin fell 11 basis points to 3.06%. Sainsbury's traded margin for volume on purpose.

• “Argos profits were broadly in line with last year” Argos was flat. It didn't cause the fall.
• “Rather than pass through the full extent of cost inflation, we invested to sustain the strength of our competitive position” Sainsbury's chose to absorb part of its higher wage and tax costs instead of raising prices. The margin paid for the market share.
• “Food volume growth ahead of the market for the sixth consecutive year” Volume growth helps profit. It isn't the cause.
• “Retail free cash flow rose 8.1%” Cash flow improved. It doesn't explain lower profit.

Explain every phraseHide the other explanations

Read together, the numbers tell one story. Both grocers kept their market share by giving back a slice of margin, and both had enough cost savings to stop profit falling far. That's what a margin reset looks like.

How much do wages and National Insurance cost the supermarkets?

The bigger squeeze on margins came from the government, not from Asda. Since last spring, employers pay National Insurance (a payroll tax) at 15% on salaries above £5,000 a year, up from 13.8% above £9,100. That hits retailers hard because they employ lots of part-time staff on modest pay. Tesco put the extra cost at £235m a year. Sainsbury's chief executive Simon Roberts said it would cost his company £140m and that grocers lacked the "capacity to absorb" such a "barrage of costs".

Wages kept rising too. The legal minimum for workers aged 21 and over, the National Living Wage, rose 50p this spring to £12.71 an hour, from £12.21. Tesco's UK hourly pay rose 5.1% last year, and Sainsbury's colleague pay rose 5%. A new packaging levy, Extended Producer Responsibility, which charges retailers for the packaging they put on the market, added another cost.

Tesco's savings covered the tax rise, with room to spare

Savings made£535m

National Insurance rise−£235m= £300m

Left for pay and prices£300m

This is the heart of our view. The grocers must find hundreds of millions of pounds of savings every year just to stand still. Tesco targets £500m again this year; Sainsbury's has delivered about £680m of a £1bn three-year target. When savings run ahead of cost inflation, the surplus goes into prices. When they fall short, margins shrink. Asda simply forced more of that surplus into prices than investors had hoped.

Food inflation shapes how visible all this is. Worldpanel puts grocery price inflation at 2.3%, and sales grew only 2.0%, so shoppers bought slightly less by volume. Spending on promotions rose 7.0%, against 1.4% for full-price goods. The Food and Drink Federation expects food inflation to approach 4% by the end of this year and pass 6% by the middle of next year. Higher inflation usually helps grocers' reported sales but tempts rivals to keep prices down to win shoppers.

Check the claimThree claims about the supermarket squeeze

ClaimAsda's price war is what squeezed margins.Tap to checkPartly trueOnly partly. Higher National Insurance, a 4.1% rise in the minimum wage and the packaging levy are bigger, permanent costs. Asda decided how much of the savings went into prices.Flip backClaimLoyalty-card prices are a gimmick.Tap to checkMythThe CMA found 92% were genuine savings, typically 17% to 25% off. They are a real, lasting cost to the grocers.Flip backClaimTesco lost the price war.Tap to checkMythTesco delivered £3.152bn of profit, above its own guidance, and its share price is about 51% above the panic low.Flip back

Why did Sainsbury's sell Argos?

Argos, the catalogue retailer Sainsbury's bought about a decade ago, has been a drag for years. A year ago, talks to sell it to China's JD.com ended after the would-be buyer came back with materially revised terms.

This summer, Sainsbury's agreed to sell Argos to Swift Partners, a vehicle led by former Co-op boss Richard Pennycook, for at least £120m (about $161m). About £70m comes at completion, which is targeted for early next year, and £50m over three years. Sainsbury's takes a roughly £350m non-cash write-down and expects lease-adjusted net debt to fall by about £250m as Swift takes on Argos's store leases. Sainsbury's keeps the Argos pension scheme.

Argos goes for little, but takes its leases with it

£120m+Minimum price, partly deferred

£350mNon-cash write-down

£250mCut to lease-adjusted net debt

The price is tiny for a business with £4.1bn of sales. Argos sales rose 0.7% last year, but average selling prices fell 3.0%, and its profit was flat. For shareholders, the sale makes Sainsbury's a purer food retailer with fewer leases, at the cost of the scale that Argos brought to non-food. It also removes a distraction while the grocery market is this competitive.

Are Tesco and Sainsbury's still paying shareholders?

Yes, generously. Tesco produced £1,957m of free cash flow last financial year (cash left after capital spending), finished a £1.45bn share buyback and started a new £750m programme to run until next spring. It raised its dividend 5.8% to 14.5p. Net debt was £10.6bn, or 2.1 times EBITDA, a comfortable level of leverage for a business with steady cash flow.

Sainsbury's returned £816m: an ordinary dividend of 13.7p a share, an 11p special dividend and a £250m buyback. It plans a £300m buyback this year and expects more than £500m of retail free cash flow. Net debt is £5.7bn, almost all of it lease liabilities, at 2.6 times EBITDA.

Tesco costs more, but Sainsbury's yields more

	Tesco	Sainsbury's
Share price	475.8p	327.6p
Market value	£29.6bn	£7.2bn
Forward P/E	15.4x	13.8x
Dividend yield	3.1%	4.2%
Operating margin	4.3%	3.06%
Buyback this year	£750m	£300m

On forward earnings, Tesco trades at about 15.4 times and Sainsbury's at 13.8 times, with dividend yields of about 3.1% and 4.2%. Those aren't distressed multiples. The market has already decided the price war is survivable.

Is the price war a buying opportunity or a margin reset?

It's a margin reset, and the buying opportunity was last spring. The scenario below shows how sensitive Sainsbury's is. Every 1% of grocery sales it reinvests in prices costs about £243m, almost a quarter of its £1,025m retail profit. For Tesco, 1% of UK and Ireland sales is about £530m, roughly a fifth of that division's £2,745m profit. Savings are what keep those numbers from hurting.

Savings decide whether price cuts hurt Sainsbury's profit

Pick how much of grocery sales Sainsbury's puts into prices, and how much new saving offsets it

Price investment

0.5% of sales1% of sales1.5% of sales

Extra savings

None£165m£330m

Retail operating profit£904m£1,069m£1,234m£782m£947m£1,112m£661m£826m£991m

−11.8%+4.3%+20.4%−23.7%−7.6%+8.5%−35.5%−19.4%−3.3%below Last yearabove Last yearabove Last yearbelow Last yearbelow Last yearabove Last yearbelow Last yearbelow Last yearbelow Last year

Last year £1,025m

£661m£1,234m

The bull case is real. Asda is still losing share and can't fund endless losses. Tesco and Sainsbury's have proven they can hold share, grow cash and buy back stock while absorbing a tax rise. Sainsbury's is shedding Argos, and food inflation should lift sales.

The bear case is just as real. Lidl is still growing sales at 8%, so Tesco keeps spending to defend its share. Wage floors rise every spring, and loyalty pricing is now a permanent cost. With the shares already up about 51% from the low, much of the good news is priced in.

Caveats

Worldpanel data come from a household panel, and they don't always match company figures. Asda's numbers come from press reports of its results, because it is privately owned. Our sensitivity sums hold everything else constant, which real businesses never do.

Our read

The price war hasn't broken the big two. Tesco ended last financial year with higher profit than before Asda attacked, its share near a ten-year high and cash to spare for buybacks. Sainsbury's gave up about 11 basis points of margin to win volume, which was a deliberate trade.

What changed is the ceiling. Margins of about 4.3% at Tesco and about 3% at Sainsbury's look like the new normal, not a low point to recover from. Every year, savings will be spent on wages, tax and prices rather than flowing to profit.

That makes these income stocks, not recovery stocks. Tesco is the higher-quality business at a fair price, with steady buybacks shrinking the share count. Sainsbury's is cheaper and yields more, with the Argos sale as a modest catalyst, but it has less room for error on cost. Neither is the bargain it was at 314.75p and 225.4p.

We would buy on another price war scare that pushes the shares down sharply, not at these levels. The signals to watch are Tesco and Sainsbury's guidance at the half-year, Asda's market share, and whether Lidl's growth starts to slow.

Go deeper

• Pricing power and inflation: how to tell whether a business can pass on cost rises, the key question for the grocers.
• Dilution and buybacks: what Tesco's buybacks actually do for each remaining share.
• Debt and liquidity: read lease-heavy balance sheets like Sainsbury's, and judge how long Asda's debt lets it fight.

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