UK SUPERMARKET PRICE WAR
Asda and Sainsbury's kick off new supermarket price war
The Telegraph Thursday 12 March 2015
Asda announces £300m in price cuts, including bread for 50p, with Tesco and Sainsbury's set to
follow
Andy Clarke, the chief executive of Asda Photo: Julian Simmonds
Asda and J Sainsbury have kicked off a new round of price cuts in the supermarket industry, with
Tesco set to follow, as the “big four” prepare for a brutal 2015.
Asda, the country’s second biggest food retailer, said it will commit £300m to lowering prices in the
first quarter of 2015, while Sainsbury’s, the third biggest, said it would lower prices on 1,000
products by investing £150m this year.
The moves by Asda and Sainsbury’s come ahead of Tesco’s highly-anticipated trading update on
Thursday, when new chief executive Dave Lewis is expected to announce major price cuts alongside
an update on his strategy for the retailer and its performance over Christmas.
Bruno Monteyne, analyst at Bernstein, said: “This means that this will be no ordinary trading update.
Unusually, the invitation for the analyst call suggests what management will specifically talk about:
restoring competitiveness in core UK business, protecting and strengthening the balance sheet, and
rebuilding trust and transparency in Tesco’s business and brand.”
The price cuts by Asda and Sainsbury’s are part of investments already announced by the
companies. Asda started the price war in the industry by announcing a £1bn, five-year price drive
unveiled in late 2013, and the £300m is part of this.
Nonetheless, the company, which is owned by Walmart, said the latest wave of price cuts
represented its “biggest ever single investment in lowering prices” and cover 2,500 items.
The cuts include reducing four pints of milk from £1 to 89p, a loaf of granary farmhouse bread from
80p to 50p and reducing Birds Eye fish fingers from £4.24 to £2.77.
However, most of the price cuts will not be permanent, running until the end of January or the end
of March.
Barry Williams, chief merchandising officer for food at Asda said: “We’re going further than ever
before, rolling back those everyday, can’t live without items at a bigger percentage than we’ve ever
been able to do previously.”
Sainsbury’s said its price cuts represent an annual investment of £150m and cover 1,000 lines. The
latest cuts follow a first round in November. The products reduced in price include own-brand pork
sausages, which will cost £1.10 for eight instead of £1.40, and tomato ketchup, which has been cut
from £1.10 to £1.
Mike Coupe, chief executive of Sainsbury’s, said: ‘We are investing £150m per year for the next
three years in some of our customers’ most popular purchases, with a total of 1,000 prices cut since
we announced this investment in November. This will come as welcome news to customers who
might be feeling the pinch after Christmas.”
The price cuts are an attempt to move the major supermarkets closer to the discounters, Aldi and
Lid, and reverse a sharp fall in sales.
Clive Black, analyst at Shore Capital, said: The British grocery market had a tumultuous 2014,
amongst the worst in living memory for investors and management alike.”
City analyst believe all the “big four”, which includes Tesco, Asda, Sainsbury’s and Wm Morrison,
could report a fall in Christmas sales. However, there are growing expectations that Tesco could
show an improvement in its performance after early moves from Mr Lewis to lower prices and
increase the number of staff in stores.
Who wins in a supermarket price war?
Financial Times
October 3, 2014
The big names hope to increase brand loyalty and ultimately market share, writes Izabella Kaminska
©AP
“Sainsbury . . . warned that the escalating price war in the grocery market would take its toll”
Every penny counts, eh?
In the supermarket business, more than ever. The battle for hearts and appetites seems to be
entering an increasingly self-destructive phase, which could result in a radical shake-up of the UK
high street.
But surely a price war can’t go on forever?
That’s the fascinating game theory of it all. While the best strategy for incumbent supermarkets
might be to hold prices at rates that assure healthy margins for all, fast-declining barriers to entry
and disruptive new competitors means a more brutal fight sometimes becomes the only option left.
Because newcomers don’t play by the rules?
Not just that. Newer entrants such as Aldi and Lidl generally have lower overheads to contend with
and often specialise in specific market segments, against which “everything to all” supermarkets
such as Sainsbury and Tesco struggle to compete.
So now it’s a race for overall market share instead?
Think of it this way. Investors are only ever prepared to subsidise losses if they believe they will be
paid off later in dominant market share. It’s what you might call the “there can be only one”
strategy.
Has that worked out in the past?
The example to avoid is Marlboro Friday. For years, Philip Morris assumed they could ignore the
cheaper brands because of customer loyalty to the Marlboro man. But then they started losing
market share. Realising only an aggressive attack could allow them to become dominant again, they
announced a 20 per cent price cut on Marlboro cigarettes. Philip Morris had a bigger and better
balance sheet than many competitors, so they hoped to survive lossmaking margins longer than the
competition. Unfortunately, the whole thing backfired when the company’s share price fell 26 per
cent after the announcement, reflecting how far the market had priced the business on the
intangible value of the Marlboro man brand.
Is that why supermarkets have been so focused on engineering loyalty through “clubcard”
systems?
There’s no doubt that loyalty programmes have been an incredibly powerful weapon in the
“everything to all people” arsenal. Tesco, of course, was a pioneer when it introduced its national
Clubcard system in 1995, and the scheme was so effective that other supermarkets realised they
would have to follow suit. Not just because the scheme literally enabled Tesco to “buy” its
customers’ loyalty, but because of the information it was able to gather on the spending habits of its
customers.
Are you saying Tesco is responsible for the big data revolution?
In some ways, yes. Which is why Tesco views itself as much as a technology firm as a grocer. In many
respects, it was the customer data that gave Tesco the ability to discount competitively. What it lost
in outright price margins, it made up in better inventory and supply chain management. The data
also allowed the company to develop and monetise a market in optimum shelf placing. In other
words, the deployment of loyalty programmes allowed supermarkets to see their customers coming,
and to game them based on their known and expected behaviours.
What’s going wrong on that front now?
Well, it’s not clear that it is. Wm Morrison announced this week that it would aim to seize back
market share from discounters such as Aldi and Lidl by intensifying its own loyalty programme. But
it’s up against specialised competitors who don’t need big data or fancy analytics to understand their
customers. These players know the pricing pressure points of their customers, meaning they don’t
need to overcharge one customer section to subsidise the other. With the big supermarkets, the
pricing pressure has got so intense that the only way forward might be to create a personal pricing
revolution.
You mean like haggling over every transaction the way you do in a Marrakesh market?
Exactly that, but in electronic form. The problem is, since this involves the questionable practice of
using knowledge about customer spending habits against their interests, there’s a major risk of selfsabotage if and when customers clock on. Airlines are the only type of vendor that have thus far
been able to make personal pricing work – mainly due to the time sensitivities associated with their
product.