The Big Price Drop initiative is not radical enough to herald a price war, says Dr Clive Black

In the face of economic adversity, consumer behaviour has changed in Britain.

Retail promiscuity is rife, an outcome of the food industry’s penchant for promotional activity as the mechanism to protect gross margins while stimulating demand. At the same time, the rocketing price of fuel has encouraged more local shopping and the purchase of smaller baskets.

In this environment, the rise in promiscuity means loyalty has taken a step back, which is a challenge for Sainsbury’s and Tesco with Nectar and Clubcard. Indeed, Tesco’s decision to double up on loyalty points a couple of years ago could be deemed in hindsight to be an error of judgement.

With real incomes falling at their fastest rate in decades - wages and salaries rising by less than 2% and essential inflation, as calculated by Shore Capital, running at nearly 9% - Tesco has reappraised its value proposition and rebalanced its resource towards price and promotion, diluting loyalty.

And so the Big Price Drop was launched. The investment in it will lead to a flat profit performance from Tesco UK in the second half of its financial year. More than £300m of this initiative will be funded from Clubcard resources and to us it represents a real investment in value.

However, is this the start of a price war? Well, while this is an undoubted turning of the screw, we still think not. Yes, Tesco has batted on the front foot with the Big Price Drop, rather than being reactive, but we do not see a structural change in industry pricing.

Furthermore, the corresponding initiatives of its competitors are reasonably selective and measured and represent every initiative possible to extol value - bar major across-the-board price reductions (note that food prices are still going up).

So, Sainsbury’s Brand Match will presumably match price rises by Tesco, as well as Morrisons’ cash giveaways and Asda’s (still peripheral) web-based Price Guarantee. There is the possibility of the industry spiralling into a price war, but it is not there yet. It would be highly irrational for each player to do so and very damaging for their investors (and probably also for suppliers).

The supermarkets, therefore, continue to ‘dance around the handbags’, waiting to see if someone comes forward with a definitive move.