Tesco’s profits increased by 17.6% for the year to 28 February 2004, largely due to a boost from international, Internet and non-food sector sales. However, high levels of competition have sparked price wars that will impact on next year’s profits. Whilst a benefit for consumers in the short term, in the longer term price wars could give large players, like Tesco, increased market power.

Supermarket giant Tesco now holds an estimated 27% share of the UK grocery market, moving it even further ahead of nearest rivals Asda and Sainsbury. The group’s record annual profit of £1.6bn (US$2.8bn) was largely boosted by a sales increase of 18.7% to £33.6bn. Much of this increase was a result of international sales and Internet sales, both of which grew by 29%. Non-food is also a key area of growth for Tesco, for example, it now sells more baby goods than Boots and Mothercare combined.

The group’s 2005 profits could be hampered by the price wars that have recently been sparked by the close competition in the UK market. Tesco announced £70m of price cuts last week, following on from Asda’s £65m cuts a few weeks before. Morrison’s recent takeover of Safeway creates a fourth major player in the market and is likely to result in further price wars as the top three attempt to draw custom away from Morrison’s converted Safeway stores.

High levels of competition are likely to benefit consumers through reduced prices, though the growing strength of Tesco enables it to undercut competitors’ prices and create an extensive number of loss leaders subsidised by other lines. An extensive price war is likely to put smaller chains and independent competitors out of business, or make them vulnerable to takeovers. While the Competition Commission is likely to restrict Tesco from any large-scale takeovers, a gradual improvement in market share will steadily increase Tesco’s power, which is of more questionable benefit for consumers.

UK regulators believe that a supermarket should not account for more than 25% of a national market, so Tesco’s dominance in this field could soon come under fire, despite claims by Tesco that its popularity is due to consumer choice.

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