Intense price competition between supermarkets and three successive years of grocery deflation are set to save UK shoppers a total of more than GBP3bn (US$5.2bn) by the end of 2006, according to a new report from Verdict Research.

 

In 2006 Verdict anticipates the third consecutive year of deflation in the food and grocery sector, as intense price competition continues. 

 

Tesco, Asda and Morrison are well known for their strong price agendas.  But the Morrison acquisition of Safeway has shifted the focus of former Safeway stores to a more price-led platform, with Morrison transferring its low prices to its enlarged store base.  Tesco and Asda have responded with price cuts of their own, and these moves have been accompanied by Sainsbury substantially bolstering its own price competitiveness.  In the face of these competitive pressures, many smaller operators have also increased their commitment to price.  These lower prices have saved the UK consumer more than GBP1bn in 2005 compared with 2003, and the annual savings will increase to GBP1.7bn in 2006, with forecast food and grocery deflation of 0.6% meaning food and grocery will cost almost 2% less than in 2003.

 

The Morrison-Safeway conversion programme has had reverberations across UK grocery retailing, dealing a timely fillip to Sainsbury while increasing the pressure on Asda.  Morrison, to date, has failed to satisfy many ex-Safeway shoppers.  With the Safeway demographic overlapping most with Sainsbury, this has provided a major boost to Sainsbury, and given additional thrust to its recovery programme.  By contrast, Asda has seen Morrison - with a very similar demographic appeal - more than double its store count in the past 18 months, and Verdict Research believes this has been a significant factor dragging down Asda's performance in 2005. 

 

The Morrison-Safeway shifting effect will continue in 2006.  Though Morrison's conversion programme is essentially completed, consumer lag in switching means there will remain a far larger proportion of customers up for grabs than usual.  Verdict therefore expects competition to intensify in the first half of 2006, and anticipates further price reductions. 

 

Of the almost GBP25bn increase in the grocery market size in the past five years - from GBP110.4bn to GBP134.8bn - Tesco has captured more than half as it has consolidated its hold on the UK market leadership. "This is a phenomenal achievement for one retailer and is unrivalled in any other major UK retail sector," comments Gavin Rothwell, senior retail analyst at Verdict and author of the report.  Tesco now claims almost twice the market share of any other UK grocery retailer.   With a share gain of 1.4 percentage points taking share to 23.7%, it stands out as achieving the strongest uplift by some considerable distance.  "Crucially Tesco has been highly successful in putting the customer at the heart of everything it does. Its Clubcard loyalty scheme has been a key tool that has helped it to give the customer what he or she wants, and it has supported this with a strong focus on value," comments Rothwell.  Elsewhere in the market, Sainsbury, as benefits from Justin King's business review fed through, achieved an estimated market share of 12.5%. Meanwhile, Asda's share increased by just 0.1 percentage points to 11.7%, representing a marked slowdown on recent years, while Morrison - in its first full year of Safeway ownership - achieved a share of 9.7%.

 

Yet Verdict sees significant growth opportunities for each of the major players in the market.  The leading grocery operators boast among the strongest brands in the UK, and have significant scope for further development.  This applies on three levels.  First, in core grocery, there is still much to go for in small store format retailing, where the sector is far less consolidated.  Secondly, non-food development represents a key area of opportunity that still has much further to go, as the leading players gain greater expertise, strengthen ranges and extend range architectures upwards.  And thirdly, the brands' typically strong value for money perceptions translate favourably to a wide variety of service areas.  Grocers are well placed to exert greater influence across retail and beyond.