Is Britain’s supermarket industry in the foothills of a price war?
While we cannot be categorical, we are harbouring the gravest concerns for nearly 20 years. Not since Somerfield sparked an unholy environment in the mid-1990s, an initiative that some weeks later Sainsbury’s then-MD Tom Vyner confirmed as a price war, has the industry been in such vulnerable gross margin territory. Back then Tesco was about to enter the ascendancy with Asda in the Norman-Leighton groove.
“Rarely if ever have each of the major groups lost share at the same time”
Today, the big four are under pressure. The sector is an oligopoly. Demand is weak as folk waste less, eat out more, segment their shopping, and tell the big four what they think of them with their feet; rarely if ever have each of the major groups lost market share at the same time.
Key agents in the current round of price pressure and worry are the limited-range discounters. Aldi and Lidl are much more in tune with customers than the big four, which have arguably been sleeping at the wheel, happy to take suppliers’ promotions, price-match and dish out coupons to increasingly well-informed customers growing more cynical and sceptical about the oligopoly.
The share gains by Aldi and Lidl, and Waitrose, for that matter, in a flat market, still absorbing recently opened space and the online channel, are now forcing trading strategies and opening programmes to change. Asda is quietly reconnecting with customers on price. Morrisons has used a megaphone, with a collapse of profits in tow, to say it is going to narrow the gap with the discounters, so bringing down supermarket share prices.
For now, price cuts work for customers. However, we are nervous about deep discounting moving from iceberg lettuce and milk to more lines. We are nervous about the robustness of supermarket profit forecasts that we have already heavily downgraded (Morrisons by 52%, Tesco by 19%). We worry for independent retailers, corner shops and farm shops. We harbour concerns as to what this may all mean for farming and processing supply chains.
We now have to watch and wait to see what happens, to Morrisons in particular. Will shoppers win in the long run?
Dr Clive Black is head of research at Shore Capital Stockbrokers