Anthony Garvey reports on reactions to Tesco Ireland's claim of an altruistic' price blitz coming, as it does, on the eve of the government's review of the ban on below cost selling The woman unloading her heavily stocked shopping trolley in the car park of a Tesco store in suburban Dublin didn't look like a war casualty. And she certainly didn't react like one. "If this is war," she beamed, "long may it continue. It's the best thing that could have happened." As the grocery price war in the Irish Republic, initiated by Tesco, enters its second month, there are few shoppers willing to share the pessimists' analysis that when multiples battle, it is the rest of the trade ­ and, ultimately, the consumers ­ who feel the pain. With food costs continuing to rise as a result of escalating oil charges and the sinking Euro, it is difficult to argue against a barrage of cuts that has sliced bread prices by almost 50% down to a 26p loaf, that offers milk at 86p for two litres (a 30p saving), and sells a dozen eggs for under I£1 (a 41p reduction). Tesco insists it has not launched a price war. Reductions of "up to 37%" across some 50 basic food items in its 75 Irish stores are not short-term promotions, it claims, but savings being passed on from improved distribution and other efficiencies. Its main rivals in the I£5bn Irish market ­ Dunnes Stores, the SuperValu and Centra chain and Superquinn ­ think otherwise, to judge from the bellicose tone of their response "They can run but they can't hide," declared Dunnes, squaring up for a checkout battle with matching price cuts and some macho fighting talk. SuperValu and Centra, the franchised chain supplied by the Musgrave Group, which recently moved into the UK grocery market through a 28% stake in Budgens, got more personal. In an advertisement depicting an elephant jumping sky high at the sight of a mouse, it asked, pointedly: "What are you scared of, Tesco? Is it that you're losing market share? Could you be scared of a family-owned, independent business such as SuperValu?" That, of course, is the question everyone in the trade is asking ­ why has Tesco chosen this particular time to launch its price blitz? According to Irish managing director Maurice Pratt, the initiative is the company's contribution towards reducing the Republic's inflation rate, currently nearing 7%, more than double the level in the UK and the rest of the EU, and causing serious concern to Bertie Ahern's government. As evidence of that concern, the government recently called in the major chains, including Tesco, to urge them to keep prices down. In his price cuts announcement, Pratt appeared to be responding to that appeal. "Inflation is not solely a government responsibility," he declared. "At Tesco, we don't think it's good enough for everyone to sit back and wait for a government move on Ireland's most pressing economic problem." But altruism, even towards governments, is not a notable characteristic among multiples. Some in the trade have been drawing attention to the timing of the Tesco announcement, coming less than a month before enterprise and employment minister Mary Harney is due to announce her decision on whether to retain or abolish the Groceries Order, which has outlawed below cost selling in the Irish Republic for the past 12 years. Could Pratt, through his price cuts, be offering government an indication of what Tesco could do to ease the inflation rate, if freed from the current legal restraints? Tesco Ireland spokeswoman Sara Morris dismisses such speculation. "We haven't entered into the debate about the Groceries Order," she says firmly. "These price cuts have nothing to do with what Harney may decide." But ISME, an association of small and medium sized Irish businesses, many of them food processors and suppliers, thinks otherwise. In a hard hitting statement, it declared: "This association dismisses Tesco Ireland's claim that the reductions are part of its campaign to tackle Ireland's spiralling inflation. The campaign should be seen for what it is ­ a promotional gimmick at the expense of the competition and a further attempt to put pressure on the government to remove the 1987 Groceries Order." The below cost selling ban must be maintained, it warned. Otherwise, the independent retail sector would be virtually wiped out, "as has happened in the UK", and competition in the Irish market seriously diminished. Unlike the UK, where the market is dominated by a small number of giant multiples such as Tesco, Sainsbury and Wal-Mart/Asda, the Irish grocery sector is much less concentrated. Three chains, Tesco, Dunnes and Superquinn, account for around 55% of the market, with "independent" retailers, including the owner-operated SuperValu/Centra stores, holding around 45% The independent sector has prospered in the last decade, increasing its market share by some 10%. But analysts cite the experience in the UK, where the independents' share is just 8%, as evidence of what would happen if the Groceries Order were removed. Tesco and Dunnes would be the big beneficiaries, and the fear is that they would use their financial and purchasing muscle to monopolise the market, with some in the trade predicting that by the end of the decade they would have squeezed out much of the local competition and increased their share to around 70%. The ban on below cost selling was introduced in January 1988, following the collapse of the H Williams supermarket group at the height of a price war. Some 3,000 jobs were lost in the collapse and several supplier firms forced into bankruptcy. Myles O'Reilly, an independent consultant who was chairman of the Irish Fair Trade Commission, which imposed the ban, argues that it is still necessary. "It has preserved a greater level of competition in the grocery trade than might have been the case," he says. "If it is removed, the effect will be to increase the market share of major multiples such as Tesco and Dunnes, at the expense of symbol stores and independent retailers, leading to less consumer choice and less competition." Ironically, the Irish Competition Authority takes precisely the opposite view. It is urging minister Harney to remove the ban, claiming that it is outdated, anti-competitive and against the best interests of the consumer. Prominent economists have been quick to lend their support to this "market forces" argument. "It's time to scrap this order so that supermarkets are free to reduce prices in whatever way they want," says economist Alan McQuaid of the Dublin-based stockbrokers, Bloxams. "If the government is interested in tackling inflation, this would be the best way of going about it. We live in a very different economic climate to that of the 1980s and unemployment is no longer a threat. "The government should take on the vested interests of smaller shopkeepers. It's no help to the consumer, or to the economy, to protect inefficient small traders." Publicly, Tesco may be taking a detached view of the debate, but the reality is that the Harney decision will have major implications for the chain as it seeks to build on its current market share of 23.4%. The arrival of the big German discounters, Aldi and Lidl, has already added significantly to the competitive pressures in the sector. Even with the newly announced Tesco price cuts, a basket of groceries from Aldi, albeit with a very limited range, is still I£2.70 cheaper. The German chain has only four Irish outlets, but with more planned over the decade, the challenge will be increasing all the time. In addition, a vigorous campaign by RGDATA, the independent grocers' organisation, backed by local councillors and environmentalists, has thwarted Tesco plans to consolidate its market position through superstores, as it has done in the UK. Persistent lobbying of environment minister Noel Dempsey, plus a report prepared by an Irish parliamentary committee on the British experience of superstores, has led to such developments being capped at 33,000 sq ft, with Tesco forced to abandon superstore plans for Dublin and Cork. So will the latest round of price cuts be sufficient to win a favourable judgement from Harney on the Groceries Order? As leader of the junior partner in the Irish coalition government, the small, radical Progressive Democrats, the minister is a self-proclaimed champion of greater competition and, like her cabinet colleagues, desperately searching for ways to head off new trade union wage claims by stemming inflation. Already, in a bid to mollify the unions, drink prices have been frozen for six months. For Tesco, that's the good news. On the debit side, government backbenchers have serious reservations about the political wisdom of removing the below-cost ban in the run-up to a general election, given the potential threat to independent retailers, an important element of community life in most constituencies. They point to statistics produced by RGDATA's director general, Ailish Forde, showing that grocery prices in Britain and Northern Ireland, where no ban exists, are some 5% higher than in the Republic. Irish farmers, alarmed at what the cut-price milk battle is doing to their incomes, are also strongly in favour of retaining the order, and want it extended to fresh meat, fruit and vegetables. "Lifting the ban will intensify the price war," warns Derek Cunningham, a spokesman for the 100,000-member Irish Farmers' Association, "and it is the producer who is already losing out." But the biggest blow to Tesco's hopes has come from the Consumers' Association of Ireland, which might have been expected to applaud the new price cuts. Instead, chief executive Dermott Jewell, denounced the exercise as "a phoney war, a marketing strategy designed to promote own-brand products which will have no effect on inflation". He complained that the Tesco price reductions centred almost entirely on own-brand products ­ a fact confirmed by the company ­ and added: "The only way supermarkets can affect inflation is to bring down prices across the board, and that is not happening here." Surprisingly, given that the Competition Authority and economists all claim the Groceries Order is against consumer interests, Jewell and his association want it retained. "The benefits of removing it would be shortlived," he warns. "Pretty soon there would be predatory pricing and casualties, among both retailers and suppliers, and only the strongest would survive." He cites statistics in support of claims that the ban on below cost selling has worked in keeping down prices. In the six years from 1994, he says, the prices of items covered by the order ­ bread, flour, milk, butter, cheese, bacon, tea and coffee, for instance ­ rose by 18.7% while other grocery products went up by 23% in the same period. He predicts Harney will renew the order. "I know the government is worried about rising inflation, but removing the Groceries Order isn't the answer. It could do serious damage to the trade, and would be very much a case of the supposed cure being worse than the disease." Tesco's good intentions could be put to the test in the coming weeks. If the order stays, will its price cuts also stay? {{COVER FEATURE }}