An all-out price "war" is unlikely

An all-out price "war" is unlikely

A number of reports have emerged that Tesco is planning a major price offensive: a move expected to spark a new price war across the UK supermarket sector.

It seems, however, that with so many pricing initiatives taking place across the sector, this latest push may be just part of the ongoing fierce competition in UK grocery.

With wilting consumer confidence, a bleak economic outlook and ever-tightening budgets, pricing has become a necessary tool for all grocery retailers in winning custom. 

Exactly how substantial Tesco's price investment is likely to be is not known. Reports suggest the cuts are slated for March, just after the company's financial year end, and are likely to herald price reductions on a range of products.

A spokesperson for the retailer insisted they had no such announcements to make and dismissed the reports.

Shore Capital analyst Clive Black said he doubted Tesco would start up an "all encompassing price war, which spreads like wild fire, leads to industry-wide mark-downs and gross margin pressure".

The advent of digital technology and the transparency that has brought means that price cuts are not a competitive advantage for very long. And, as rivals scramble to catch up, downward pricing pressure can quickly snowball into an avalanche. 

"The internet injects a lot more transparency into supermarketing these days," he tells just-food. "As such, the time advantage from extensive cuts is limited with price matching around."

While transparency in pricing may be one reason for not launching a sizeable price offensive, the latest UK inflation figures could well be another if Tesco does not want its margins to suffer.

Data from the Office for National Statistics revealed annual food inflation increased by 50 basis points to 4.5% in January, a figure Black's Shore Capital suggested was "maybe stronger than we expected".

One of the primary drivers behind this high level of price inflation is rising costs, as last year's surge in commodity and energy prices are still being passed down the chain. Added to this can be the prospect of short UK stock levels and a weak sterling, which means retailers will face continued pressure on costs. Funding price offensives could well come at the expense of profit margins.

Inversely, food inflation has resulted in softening volumes as consumers respond to higher prices by buying less. Across the food retail industry, sales gains have been driven by pricing - with volumes largely flat to down.

Continued rising food prices suggest pressure on consumer spending is likely to remain a feature of the UK retail scene throughout 2013. This in turn will mean that sales volumes will remain under pressure accross the sector, with higher input costs impacting retailer's ability to generate profit if sales fall. 

"We suggest that a further increase in food inflation is likely to put further pressure on UK food industry volumes, volumes which we believe remain negative for the third year running, so sustaining the pressure on UK operating ratios from negative operational gearing," Black said. He predicts food inflation could reach 4-5% as we move through to the summer.

Tesco is therefore faced with a dilemma: the UK's largest retailer may be reluctant to invest too strongly in price at the expense of its margins, which are already under stress. On the flip side, however, the retailer may decide it needs to invest in price in order to stimulate volumes.

In this circumstance, Black says Tesco could "see merit in sharpening its pencil" on price as part of a broader strategy.

"Tesco might see a further reinforcement of its value credentials as a virtue alongside a balanced approach that seeks to enhance service, exclusivity, product quality, loyalty through Clubcard and the basic interest factor of Tesco stores," he says.

There is no doubt that price competition remains fierce in the UK grocery sector, but it seems the transparency of price in our increasingly technology-driven world and the volatility of food inflation certainly has made it more difficult for grocers to gain a substantial competitive advantage through pricing alone.