There was much talk in the UK food industry this week that Tesco was about to launch a major offensive on price. There were fears among some investors – and no doubt suppliers and rival retailers – that the country’s largest retailer would make savage price cuts and spark something of a price war. Yesterday, Tesco announced its Big Price Drop and, although the move is likely to hit some suppliers and its rivals, the initiatives are more measured than expected. Dean Best reports.

In April, Tesco CEO Philip Clarke, only a month into the job, said the retailer could do “better” in its domestic market. Announcing Tesco’s annual results, Clarke said the company had not achieved its targets in the UK in the previous 12 months and admitted that could only be partly blamed on the tough trading conditions in the country.

Clarke said Tesco would be “taking action” in a number of areas, including a move “to improve the sharpness of our communication to customers”. Yesterday, the retailer outlined a set of initiatives that appear set out to do just that.

Tesco announced what it called its Big Price Drop, moves, it said, to cut GBP500m (US$775.5m) from the price of thousands of items. Richard Brasher, chief executive of Tesco’s UK operations, said consumers’ budgets were “under real pressure”. Shoppers, he said, wanted “more help today to afford everyday essentials”. And he added: “We have listened carefully and for families facing hard times and looking for genuine savings, The Big Price Drop will cut prices on the products they need to buy the most.”

The retailer is seeking to communicate to UK consumers that it can provide the best value. Tesco’s rivals have been more vocal on this front, with Asda’s Price Guarantee a prominent example. Sainsbury‘s new marketing slogan ‘Live Well For Less’ attempts to emphasise the value it believes shoppers can find there. And, elsewhere in the UK, discounters Aldi and LIDL are increasing their market share. Tesco is not the only major UK food retailer losing ground – Asda also saw its market share fall year-on-year, according to the latest Kantar Worldpanel data – but the country’s largest grocer is keen to convey to consumers that it is in their stores where they can find value.

The Big Price Drop certainly grabbed attention. The apparent GBP500m of price cuts was the headline figure but the overhaul also included other initiatives. The retailer plans to “simplify” its promotions, a move that will see it reduce the number of multi-buys. Tesco will also end its double Clubcard promotion in four weeks time. Shoppers will receive one point for every GBP1 spent, rather than two.

Verdict Research retail analyst Cliona Lynch said Tesco had now moved to a “clearer, low-price proposition” amid a level of promotions in the UK that cannot be maintained in the long term.

Lynch explained: “The culture of promotions which is embedded in the grocery sector, is unsustainable. Deeper and wider promotions have reached a peak level across the Big Four. Moreover, the ubiquitous nature of promotions is blurring the value message for consumers. With consumer spending power low and price inflation still high, shoppers are increasingly looking for a strong value message from their retailer. Tesco is sending a clear signal to both customers and competitors that it can provide that value with a simplified strategy.”

Tesco’s rivals immediately moved to counter the retailer’s claims. Sainsbury’s labelled Tesco’s strategy as “classic smoke and mirrors” and said its larger rival was “giving with one hand and taking with the other”. It added: “Removing double Clubcard points will save Tesco GBP350m. It is no surprise to us that Sainsbury’s price match policy, together with a stronger own brand offer, has forced Tesco to take this kind of action.”

However, putting the PR warfare to one side, Tesco’s rivals at Sainsbury’s, Asda and Morrisons are likely to be feeling more relaxed. There would have been fears among the other multiples – as well as Tesco’s suppliers and investors – that it was set to wield the axe and issue savage price cuts in a bid to regain market share. Instead, industry watchers believe Tesco has adopted a measured approach.

“It remains to be seen what impact this new Tesco PR promotion will have on gross margins and what reaction it will cause in the industry but we don’t think it will rock the boat too much, as most of the so-called ‘GBP500m’ investment in the Big Price Drop will be funded by cutting Clubcard points investment as Sainsbury’s has pointed out,” Arden Partners analyst Nick Bubb said today.

Speculation about Tesco’s plans earlier in the week had hit its rivals shares as the market grew concerned that the retailer’s new strategy could lead to something of a price war. 

Analysts at MF Global said Tesco’s move was “unlikely to spark a full-blown price war. At RBS, retail analyst Justin Scarborough said there would be “relief all round that Tesco has not announced anything irrational”. He said Tesco’s moves to switch investment from buy-one-get-one-frees to price cuts was a “re-allocation of investment not a tangential shift”. Scarborough added: “There was a concern following the rumours this week that Monday next [week] would could have seen some irrational behaviour from Tesco in terms of its UK grocery business – the bears clearly had a field day suggesting this would be the case – they are wrong again.”

However, suppliers will be scrutinising Tesco’s new strategy and seeing what will be the impact on their businesses when it goes live on Monday. Tesco said “most of the investment” would be on over 1,000 own-label products. MF Global believes manufacturers with an “exposure to mid-tier brands and private label are at risk to tighter terms of trade”, including Premier Foods plc, Greencore and Dairy Crest.

And, for all the relief that Tesco’s new strategy is not as aggressive as was speculated, suppliers will be anxious about the impact of its new strategy, particularly with commodity prices volatile and consumer confidence remaining low. Input costs have eased a little but consumer sentiment is weak and the search for value as intense as ever. Tesco’s new approach is not a game-changer but it will cause waves among its rivals and its suppliers.