Price wars threaten to reshape landscape of supermarkets

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Information about Price wars threaten to reshape landscape of supermarkets
Business & Mgmt

Published on March 19, 2014

Author: brainworks12

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Price wars threaten to reshape landscape of supermarkets

March 18, 2014 6:01 pm Price wars threaten to reshape landscape of supermarkets By Andrea Felsted, Senior Retail Correspondent When Wm Morrison announced that it would invest £1bn cutting prices over the next three years, it threatened to turn the regular skirmishes between Britain’s big grocers into trench warfare in the supermarket aisles. The so-called big four – Tesco, Asda, J Sainsbury and Morrison – have sparred over the past five years, trying to win cash-strapped customers as the economy turned down and the volume of food bought fell for the first time in living memory. But seasoned supermarket watchers say this time the situation is much more serious. “This is very very different,” says Dave McCarthy, analyst at HSBC. So far, the battles have largely been fought between the big four, which together control about three-quarters of the market. But over the past five years, a new challenger has emerged. German discount supermarkets such as Aldi and Lidl have not only been expanding aggressively, but have been shedding their no-frills image. New products, such as lobster tails, and luxury Christmas puddings, have appealed to the squeezed middle classes. According to Kantar Worldpanel, the consumer research group, more than half of all British consumers have shopped in Aldi or Lidl. Other value retail chains, including Poundland and B&M are also helping change the competitive landscape as they expand their grocery offer. “The fact is we have a material new force on the retail front,” says Clive Black, analyst at Shore Capital. Wm Morrison chief executive Dalton Philips echoed this last week. “[The discounters] are a growing channel. Price is extremely important in that channel.”

Some rivals had already become aware of the threat. Late last year, Asda said it would spend £1bn cutting prices over the next five years, while last month, Tesco said it would spend £200m cutting prices of core products, such as tomatoes, onions, peppers and cucumbers. Days later, Tesco intensified the competition, when it said it would cut the price of its own label four-pint bottle of milk from £1.39 to £1; it was quickly followed by rivals. Unlike previous battles, which have been fought on special offers largely funded by suppliers, the new offensive is focused on cutting the prices of everyday items. This involves sacrificing some of the supermarkets’ profit to drive sales, rather than just passing the pain onto suppliers. “There are some serious pledges here to reduce prices substantially on some high profile items which will cost tens of millions of pounds,” says Mr McCarthy. “This is real.”

Mr Black of Shore Capital reckons the price wars will continue to heat up and sees the “skirmishes being more violent and containing more tension than they have done for many years”. Much will now depend on the reaction of rivals. Tesco, Asda and J Sainsbury all run price matching schemes, raising fears of contagion from Morrison to the broader market. Justin King, chief executive of J Sainsbury on Tuesday appeared dismissive of rivals’ price tactics, describing them as part of the usual “cut and thrust of the market” and dismissing the threat of discounters as nothing new. “We have been competing hard with them, and we will continue to [do so],” he said. Andy Clarke, chief executive of Asda, also told the FT that “the structural change in the market is something you could see coming for some time” and that Asda had already responded by cutting prices and ditching “gimmicks” such as money-off vouchers. Tesco has so far stuck with its decision to spend £200m cutting the price of staples, investing £200m in a fuel savings scheme for holders of its Clubcard, and matching rivals prices through its Price Promise scheme. But some analysts believe it will inevitably be drawn into the fray. “Tesco has the strongest margin, but this has been shrinking for several years. It may now be pushed to rethink its pricing in order to defend market share, which has come under pressure as evidenced by weak 2013 Christmas trading,” wrote analysts at Fitch Ratings credit agency. Others expressed surprise at how little Morrison had cut prices over the weekend. “Usually when you start a price war, you let off a couple of rockets and bombs rather than saying we will set off a price war and not doing much over the following weekend,” says one seasoned grocery watcher. He suggests that far from seeing off the discounters, the price-cutting campaigns might actually play into their hands. Not only have Aldi and Lidl gained free publicity, they have also responded on price, with Aldi already cutting the price of some fresh produce. Such concerted action by the discounters could lead to a nightmare scenario for the big four, where they erode profit and weaken their balance sheets, only to see little impact on sales.

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