Asda bakery aisle

Asda has massively reduced the price gap with the discounters as its investment in own-label Farm Stores products begins to pay off, according to a new report.

Analysts at Bernstein said several of the major supermarkets had made significant inroads to become more competitive with Aldi and Lidl, which was bringing closer the time when there would be “normalisation” of UK food retail.

However, it was the Walmart-owned giant that had done the most to cut the gap and was now actually cheaper than the discounters on many lines, said Bernstein.

Bernstein said Tesco’s investment in its Farms brands had seen it become the first to narrow the gap, but Asda was now moving ahead.

“Asda finally acted on private label,” wrote senior analysts Bruno Monteyne. “[on key own-label fresh products], they narrowed the gap to Lidl from 16% a year ago to 6% today.

“On their (limited) range of Farm Stores products, similar to Tesco’s Farms brands, they are actually 5% cheaper than Lidl.”

Monteyne added: “This removes the last bit of pricing oxygen for the discounters. Asda has strong consumer and geographic overlap with the hard discounters.

“With Asda addressing its weakness in private-label pricing, this will put further pressure on both profitability and sales growth of hard discounters.

“As discounter growth is already limited to space growth (and inflation), Asda’s actions will further damage the returns hard discounters make on their new space. Therefore Asda’s action brings closer the ultimate normalisation of UK food retail.”

Bernstein said Tesco had kept its narrow price gap on Farms brands versus the discounters but had delayed passing on inflation at the start of this year.

“This has now largely been reversed, boding well for H2 margins, and hopefully the Tesco brand will have strengthened.

“Morrisons has not followed the path of Farms brands and Farm Stores on PL products, but has materially narrowed the gap on the small set of branded items carried by hard discounters, down to a 4.4% price gap, the narrowest it has ever been.”

The report comes a day after a price war began on Christmas essential vegetables, with Tesco launching its Festive 5 promotion, at 29p each, 10p cheaper than last year

Bernstein said: “This action was an important component in the first successful Christmas campaign of Dave Lewis that they keep repeating.

“We expect the discounters and Asda to follow suit. This is essential in Tesco and Asda bolstering their value credentials/brand during a key trading period, and it keeps the investment targeted at the discounters.”