Why supermarket price wars make investors' nerves jangle: Greg Wright
Nothing sets investors’ nerves trembling quite like the prospect of a supermarket price war.
The Leeds-based supermarket chain Asda caused a stir when it pledged to cut the prices of thousands of products and revive its stores in a bid to win back shoppers from rivals. In January, Asda said it had brought back its Rollback pricing scheme which saw the prices of more than 4,000 products in store and online slashed by an average of 25 per cent. It plans to continue to add thousands of new products to Rollback at regular intervals during the year as it looks to move its entire range to a new low “Asda Price”.
Allan Leighton, Asda’s Executive Chairman, said: “Following the return of Rollback in January, our price advantage has strengthened and customers’ perceptions of the value we offer is starting to improve.”
Mr Leighton said that, while regaining customers’ trust will take time, Asda will undertake a “substantive and well-backed programme of investment in price, availability and the shopping experience”.
A source close to Asda added that the business has a “substantial war chest” to invest in lowering prices for customers over the long term.
AJ Bell head of financial analysis Danni Hewson said Britain’s listed grocers took a beating earlier this week, with billions wiped off the combined market value of Tesco, Sainsbury’s and Marks & Spencer since markets closed on Thursday.
Ms Hewson said: “Rival Asda has set the cat amongst the pigeons by warning its profits were likely to drop this year as it seeks to cut prices in a bid to lure back shoppers who’ve been taking their trollies elsewhere.
“Giving shoppers a reason to keep coming through the doors will be a priority for legacy players trying to keep discounters from gobbling up more market share. Once a customer is perusing the aisles it’s easier to tempt them to pop a premium meal deal in their basket or treat themselves to an offer on six bottles of wine. The impact of increased labour costs has been highlighted by supermarkets as a huge hurdle to overcome,’’ Ms Hewison added.
"Add in concerns about tariff wars and inflation which is still simmering and it’s hardly surprising that investors are nervous about the potential impact on profits all those headwinds might have, especially if price wars become supercharged.”
But who benefits most from supermarket price wars? In the short term shoppers are certainly the winners, although they might question why these price reductions weren’t implemented earlier. For grocers, a strategy of slashing prices may keep the tills ringing merrily, but it could have a long-term impact on profitability, which explains why investors are feeling jittery. In any event, the supermarkets are about to face arguably the biggest challenge of all. Last autumn, the big grocers warned that job losses would be inevitable after increases to National Insurance contributions were announced in the Budget. We should be prepared for announcements of further efficiencies as the war for customers heats up.
Greg Wright is the deputy business editor of The Yorkshire Post