By James Davey

LONDON (Reuters) -Tesco, Britain's biggest food retailer, warned on Thursday its profit would likely fall this year as it set aside cash to deal with a step up in the "competitive intensity" of the market, sending its shares down over 6%.

Last month, Asda, Britain's third largest grocer, said it would take a hit to profit to finance a major campaign of price cuts aimed at reversing a slide in market share.

Tesco CEO Ken Murphy said its guidance reflected not only Asda's move but "a general intensification of competition across the board" and was issued from a position of strength.

"Competitors are clearly looking to defend the share gains we've been taking," he told reporters.

"Whatever the competitive environment and whatever comes our way, we're capable of dealing with it, that's the message," he said. Without declaring a full-blown price war, he noted that last week Tesco cut the prices of hundreds of key items.

Tesco, whose share of Britain's grocery market has grown this year to nearly 28%, a level not seen since 2016, forecast adjusted operating profit of between 2.7 billion and 3.0 billion pounds ($3.5-$3.9 billion) in the year ending February 2026. That compares with a slightly better-than-expected 3.13 billion pounds in 2024/25, a 10.6% increase on the prior year.

Before the update, analysts had on average been forecasting a 3.2-billion-pound profit for 2025/26.

Shares in Tesco, which had fallen 11% since Asda's warning last month, were down 6.3%. Rivals Sainsbury's and Marks & Spencer were down 4.7% and 2.1% respectively. In contrast, the FTSE-100 index was up 3.8% after the U.S. tariffs pause.

'GETTING THE KNUCKLE-DUSTER OUT'

Shore Capital analyst Clive Black said Tesco was "getting the knuckle-duster out".

"Whilst there is no price war at present, Tesco is giving the market a clear statement that it is up for a fight," he said.

Most analysts think Tesco's strategy of matching the prices of discounter Aldi on key items, together with its Clubcard loyalty scheme, which provides lower prices for members, is working.

The group's sales rose 3.5% to 63.6 billion pounds in 2024/25. Fourth quarter UK like-for-like sales rose 4.3%, having been up 3.8% in the third quarter.

Tesco is facing a jump in costs in 2025/26 due to higher social security payments imposed in the Labour government's first budget last October, a hike in the national minimum wage and a new packaging levy.

To offset a 235 million pound increase in employer national insurance payments and a 5.2% pay rise for store workers costing 180 million pounds, Tesco will seek a further 500 million pounds of savings in 2025/26.

Finance chief Imran Nawaz said investors should read a further share buyback of 1.45 billion pounds and a 13.2% hike in the dividend "as a sign of confidence".

(Reporting by James Davey. Editing by Paul Sandle and Mark Potter)