The price war in the UK’s supermarket industry is intensifying, with Tesco announcing it will slash the price on 380 basic food items by 25% in the coming days to compete with among others German budget supermarket Aldi and Lidl. The move will however, according to OC&C Consulting, place producers’ margins under further pressure.
Supermarket price wars
The last years have seen changes to the UK’s supermarket landscape with stiff competition from budget supermarkets Aldi and Lidl offering consistently low prices, knocking the Big Four supermarkets from their past profitable perches. Morrisons has posted a sharp decline in like-for-like sales in the first half of 2014, while Tesco and Sainsbury’s reported falls of 3.7% and 1.1% respectively in like-for-like sales. Aldi in contrast has seen its market share increase from 4% in 2013 to 4.8% in 2014, while Lidl has increased its share to 3.5%.
In response to the change in shopper behaviour, from brands to the cheapest, the Big Four supermarkets are starting to slash prices on their own budget lines in the hopes of keeping customers and upselling produces where possible. This week Asda cut the price of 2,500 “essentials” including fruit and vegetables, cereal and nappies, and Tesco announced yesterday that it would follow suite and cut the price of 380 essential items by 25%. With the move, the grocery store wants to remain more competitive and increase the “up-sell” of items available at its store and not at budget markets. "Part of their motivation for wanting to get to something simpler is that it clears out some of the clutter and makes it more feasible for the shopper to be guided toward things they ultimately might want more, and be prepared to pay for," explains Will Hayllar, co-lead of the consumer goods team at OC&C Strategy Consultants.
The move to offer consistently low prices on basic and essential items will, according to a spokesperson at Tesco, “improve the competitiveness of the UK customer offer and to strengthen the balance sheet”. The past practice of offering discounts on staple items every so many weeks, no longer of this time. "Customers told us they wanted prices which are simple, lower and more stable," says Tesco Chief Customer Officer Jill Easterbrook.
The move to “cheaper” essential items, has a knock on effect to producers. The supermarket price wars in the early 90s and the creation of “home brand” budget essentials already wreaked havoc on producers, who are now facing some of the lowest profit margins in their existence at an average 5.2%, revealed a recent study from OC&C. With the new budget supermarket entrants and the escalating price war, the pressure on producers is only set to increase, with producers set to enter "bumpy waters for the next few years,” according to Hayllar, going on to remark that: "Having already endured commodity price inflation, and a consumer spending squeeze during the recession, food producers don’t have the profit base to fund any further discounting."
The move to create stable low prices might however, create certain benefits for both producers and suppliers as it creates both certainty and reduces the waste of having to create marketing material for constant marketing campaigns. Tesco’s motivation is then not merely keeping market share but also to cut costs and strengthen its relationship with suppliers. "That would be the carrot to persuade them to give Tesco the absolute best price," says Duncan Swift, head of the food advisory group at accounting firm Moore Stephens.