Return of supermarket battles

Last week, Sainsbury’s announced its January Savers promotion. A number of national newspapers reported this as the potential start of a new price war. They also reported claims that the promotion would save a customer around 20 on a typical weekly shopping basket of 70.

Alaric Evans from Taylor Nelson AGB Superpanel uses Retailer Price Track information to assess some underlying trends and changes in grocery retail pricing.

The grocery retailers saw genuine price deflation during much of 1994, but since then prices have been rising.

Despite promises of intense price competitiveness for Christmas 1995, the overall trend for supermarket pricing was strongly upward last year, particularly in the second half (see chart one). The rate of annual increase peaked in September at six per cent (when supermarket prices were mentioned as a contributor to an increase in the Government RPI figures).

Later months have shown lesser increases but these have been increases on inflation in 1994, while the September increases were on deflation the previous year.

While some increases will be passed on from manufacturer price rises, this does suggest some room for real price reductions. However, this opportunity was not taken at Christmas.

Sudden major revisions in pricing are surprisingly rare. The last one recorded by Taylor Nelson AGB was in June 1993, when Somerfield’s first Price Check was launched. Somerfield’s Retailer Price Track Index fell overnight by five per cent, indicating that the average basket purchased genuinely cost five per cent less.

This is a very different scale of change from the Sainsbury example quoted of saving 20 on a 70 basket – which compares promoted prices to the previous full price of these goods. Obviously people buy other goods as well or instead. Most importantly, in practice, last week’s basket will have contained last week’s promotions – not this week’s promotions at last week’s prices.

However, more gradual changes in price position are occurring all the time.

Over the past three years, and particularly the last 18 months, Safeway has become comparatively cheaper – and is now broadly competitive with Sainsbury and Tesco, while Asda has also become cheaper from a lower price position. Sainsbury and Tesco have remained very similar in pricing over the period.

These changes in relative position have only come through as overall prices have increased, reflecting different rates of price inflation among the major stores, rather than price reductions across the board. (see chart two).

Quite simply, Asda and Safeway have been holding price increases to a lower overall level.

In recent years, grocery superstore prices and margins have been higher on fresh foods than in the traditional packaged grocery area. It is in this area that Safeway and Asda have become much more competitive, almost certainly at the cost of gross margins – see charts three and four.

It seems that failing to take the same price increase may not ring the alarm bells among competitive retailers as much as an obvious price promotion.

However, Asda has reduced prices in grocery and, reflecting recent publicity, is also now also very competitive in the toiletries area.