The Chips are Down

It seems an unlikely start to a war. But Asda’s move to slash the price of frozen chips last week set supermarket pundits wondering if this may be more than just another headline-grabbing PR stunt.

The move on frozen chips, which saw prices slashed to 1.19 for a 4lb bag, has been interpreted by some as the opening shot in a more sustained price war. The first in the supermarket world for four years. More significantly, a return to a price war would be an admission that the move by supermarkets into expensive loyalty programmes and financial services schemes was miscalculated – that they had put too much emphasis into these, rather than core activities.

It capped a bad week for supermarket share prices. Having ridden high for some months, industry observers are starting to think that it was just all too quiet out there.

This sentiment was fuelled by Sainsbury’s profit warning at the end of last week, suggesting pre-tax profits would come in at between 640m and 650m, far below City expectations which ranged between 695m and 720m. Blamed on the costs of “building sales”, the profit shortfall knocked 900m off Sainsbury’s share price. Like-for-like sales in the Christmas period were 4.4 per cent up, compared with Tesco’s seven per cent. “This has added to uncertainty in the sector,” one analyst says. It provides further evidence that pricing may become the main weapon again in the battle for market share. Some pundits are predicting the worst price war for 15 years.

At the same time, AGB Research shows Asda’s market share has slipped over the Christmas trading period fuelling a rumour that had been circulating in the City earlier in the week. Chief executive Allan Leighton, dismayed at the news, was preparing to invest one per cent of the chain’s gross margin into across-the-board price cuts, starting in the early spring, according to the rumour.

With Asda’s market share stalling, at least one of the conditions for a price war is in place. Much now depends on whether it chooses to ditch plans to follow its rivals into the loyalty card and financial services arena (MW January 17). It will have saved some money which it could invest in a margin-slashing round of price cuts, even though it is already perceived as the cheapest supermarket of the big four.

Such an investment of margin would hit supermarkets’ share prices hard, and would probably force Tesco into a price-cutting response. According to the domino theory of supermarket pricing, this would lead Sainsbury’s – and then Safeway – down the same route.

“We don’t have any definite plans that I could discuss,” says an Asda spokesman, “but we would not rule out anything. This seems like an unreliable rumour.” Both Tesco and Sainsbury’s refused to comment on what they described as “speculation”.

The AGB data showed that Asda’s market share fell by 0.3 per cent to 13 per cent in the four weeks to January 12, compared with the previous month. According to AGB, Asda has done well on its clothing and entertainment sales over Christmas, but has not fared so well on packaged groceries – just the area where supermarket price wars start. Tesco’s market share was flat at 23.2 per cent and Sainsbury’s share rose by 0.6 per cent to 20.1 per cent.

The figures give some credence to the suggestion of a more concerted attack on prices this year, especially if Tesco maintains the momentum of its recent market share success. Since overtaking Sainsbury’s as the number one supermarket 18 months ago, its market share has edged ahead and it will not want this position eroded.

Seeing Sainsbury’s weakness, Tesco may be tempted to put the boot in further with another price initiative on top of the Unbeatable Value campaign launched in the autumn.

Analyst David McCarthy of BZW says: “The sector has topped out. There must be some move coming from someone – the next share price movement will be downward. There is deflation in produce and there could be a price campaign – and I would guess it would come from Tesco or Asda. It is a question of keeping their momentum going.”

There has not been a serious, margin-busting price war since Gateway (now Somerfield) sparked one in 1993, in response to the arrival of continental discount supermarkets. But by last year, price had slipped down shoppers’ agenda.

Supermarket moves on customer service – investing in bag packers and customer service advisors – and the considerable money they have ploughed into their loyalty and fin-ancial service schemes deflected the shoppers’ eyes from prices. But some observers are wondering how soon it will be before the focus shifts back.

Many analysts dismiss the story that Asda is about to press the nuclear button and go for a price war, saying it would be the wrong way for the chain to go. After all, with the economy looking stronger than it has for many years, it would be foolish to rock the boat, they reason.

One of the chain’s main successes has been to increase the number of shoppers it gets through its doors. If it slashed prices further, this would just encourage those hard-won shoppers to cut their weekly bills – Asda would be giving away its margin with little tangible gain.

Asda denies that the price cut on chips presages a more concerted promotion on prices. A spokesman says it has targeted frozen chips because the price of potatoes has fallen from 120 a ton to 40 a ton, while the prices of branded and own-label chips have not fallen correspondingly.

The move shows that there is room to cut prices in other areas, with raw material prices on many food stuffs falling back to their levels of two years ago. The strength of the pound and a good harvest could reverse last year’s sharp increase in prices.

With potatoes, animal feed and wheat among those products with plummeting prices, there are other areas where Asda could slash costs. An Asda spokesman says: “We are always on the look-out for new areas to deliver value, and we are looking at one or two things in relation to wholesale prices.”

Other supermarkets will be forced to follow in those areas. Asda has been quick to take advantage of wholesale price deflation. While a price war may not be in its long-term interests, can Leighton really resist the short-term headlines one would certainly bring?

Other analysts argue that supermarkets have entered a period of new stability, and none are willing to risk this by sparking a price war. But this view took a battering with Sainsbury’s profits warning.

The issue of price is never too far from the surface. After last year’s shift in shoppers’ priorities, away from prices and on to customer service and loyalty cards, it is time for one of the big chains to come along and turn their attentions back. The continuing tough conditions for Sainsbury’s makes it vulnerable to competitors. If trading at Asda has been weak over Christmas, Leighton could be prepared to up the stakes with more sustained price-cutting.

Last week, the view that stability was returning to grocery retailing in 1997 was laid to rest by a bag of frozen chips. And with it the prospects of price becoming the number one marketing tool moved further up the supermarket agenda.