Price war warning in UK retail

Price war warning in UK retail

Traditionally, UK consumers have not been governed primarily by price when choosing where to shop for groceries. More persuasive factors include the range of product available, quality of goods offered, and convenience of access, and many consumers have been willing to pay higher prices to shop in superstores performing well on these counts. However, a new report by retail consultants Verdict claims that heightened price awareness and an economic slowdown will lead to more competitive pricing and a focus on price as a selling point.

Verdict’s report does not claim that UK grocers are overcharging — it says the market is too highly competitive for that. The average operating profit margins of the leading four grocers Tesco, Sainsbury, Asda and Safeway have fallen by nearly one fifth from 7.2% in 1992/93 to 6.0% in 1997/98. It calls for factors such as longer European supplier payment terms and the preponderance of leasehold property to be considered when drawing comparisons with foreign retailers.

Threat to independents

However, the Office of Fair Trading’s ongoing investigation into supermarket purchasing and pricing policies, fuelled by keen attention from the media, has served to make consumers far more aware of pricing differences not only between different UK retailers, but also between their local supermarket and its counterparts on the continent. The majors have been forced to react to this pressure to maintain market share. For example, Safeway has already announced 40m [pounds sterling] (ECU57.1m) of price cuts.

Beneficiaries of this increased price awareness (and also of former discounter Kwik Save’s acquisition by Somerfield for conversion to the its own fascia) are the hard discounters, such as Lidl and Aldi. Verdict expects to see these groups raising gross margins to achieve profitability and generate cash. Meanwhile, Verdict recommends that all players try to resist the temptation to outperform through a dramatic move on price. A price war would be damaging to retailers’ share prices and could put smaller groups and independents out of the game altogether. However, with an economic recession on its way and consumers demanding lower prices, a full-blown price war seems a likely outcome.

“Verdict on Grocers and Supermarkets” See back page for report details.

Grocers’ share of food, drink, health & beauty and CTN markets

1988-98 (%)

1988 1993 1998

Tesco 9.3 11.7 17.3

Sainsbury + Savacentre 9.6 12.4 13.3

Asda 4.9 6.7 8.8

Safeway 6.8 7.8 8.0

Co-op (food) 7.5 6.4 5.2

Somerfield 6.7 4.2 3.5

Kwik Save 2.2 3.9 2.9

Morrisons 1.2 2.2 2.7

Iceland 1.4 1.6 1.9

Waitrose 1.7 1.5 1.8

Aldi — 0.4 0.9

Lidl — — 0.5

M&S 3.5 3.2 2.9

Netto — 0.2 0.3

Others 45.3 37.8 30.0

Source: Verdict

COPYRIGHT 1998 Agra Europe Ltd.

COPYRIGHT 2000 Gale Group