Supermarkets’ new price war risks damaging relations with food brands and consumers

The question over whether the supermarkets are embarking on a price war appears to be getting answered. This week, Tesco announced a further round of price cuts with the cost of items from baked beans to bacon to prepackaged cucumber falling. That is on top of the £200m it has already said it will invest.

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The Co-operative Food, meanwhile, has said it will invest £100m this year in cutting prices and is launching a “Fair and Square” marketing campaign to get the message out. Morrisons and Asda have both announced £1bn investments.

The investments are a reaction to a shift in consumer behaviour away from weekly shops in large out-of-town hypermarkets to a focus on value and convenience that has polarised the grocery industry. Aldi and Lidl are seeing double-digit growth while Waitrose and M&S’s growth are outpacing the wider market.

That has left all the big four experiencing falling market share. To defend their positions they are focused on price.

That is starting to have an impact on food brands. Premier Foods, which owns brands including Hovis and Mr Kipling, partly blamed the weak grocery market for a 6.2 per cent drop in first quarter sales. It called sales at the supermarkets “subdued” and said it expected trading conditions to “remain challenging”.

The promise of a price war is unlikely to boost optimism at food suppliers.

Currently most of the cuts are focused on own-brand. That might sound like it doesn’t affect the likes of Premier Foods, but it does. If own brands become even cheaper compared to branded products then consumers become increasingly likely to buy them.

That puts pressure on brand owners to reduce the price of their products or offer promotions to boost sales.

That is not a route that the brand owners want to go down. The biggest FMCG companies, including Procter & Gamble and Unilever, have all said they want to move away from the promotions that became so prevalent during the recession and which they claim damaged brand equity and put pressure on margins.

Plus if this becomes an all-out price war it’s likely that branded products will be impacted as well. There is only so much of the cost the supermarkets will absorb before they ask their suppliers for some help.

So far, the major supermarkets have refused to confirm or deny suggestions that they might slash suppliers’ prices. However, analysts believe it is only a matter of time before costs are passed along the supply chain.

However, that is a dangerous road to go down. The likes of Coca-Cola and Unilever are said to have previously pushed back against attempts by retailers to drop the price of goods they sell.

Having been vociferous in their talk about moving away from promotions, they are hardly going to accept a cut to prices that would still reduce brand equity and leave them with less money to invest in innovation and new products. In fact, Premier Foods is relying on the launch of new ranges and increased marketing to build up its brands and boost sales in the second half.

If retailers start conversations with their suppliers about reducing costs we can be sure of kick back, if not outright mutiny. That can only be bad news for the retailers.

It is also bad news for consumers used to a huge choice and near-constant influx of new products to try out. Downward pressure on supply prices could lead to reduced product development, quality and range, hardly what retailers want to be promoting at a time when customers are more fickle than ever.

It might be tempting in the short term to put pressure on the Premier Foods, Unilever’s and Coca-Cola’s of this world to buoy sales and mitigate the rise of the discounters. For the long term retailers need a more innovative way to prove to consumers that they should be shopping with them.

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