UK grocer Sainsbury’s has admitted that if Asda maintains its current growth rate, the upstart could take its position as the UK’s number two supermarket chain. Wal-Mart’s heavy investment in Asda has allowed it to expand geographically, provide competitive prices and build a wider range – key areas which will win or lose customers.

Sainsbury’s cannot rely on its loyalty card, especially as an Asda/Safeway merger would leave it far behind.

Sainsbury’s admission that Asda poses a serious threat to its market share demonstrates that supermarket customers are still motivated by price, not loyalty bonuses.

Ever since Wal-Mart took Asda over, the supermarket has invested for growth, with the result that it now controls 14% of the UK supermarket sector, compared to Sainsbury’s 17.2%. Asda has been growing much faster than either Sainsbury’s or Tesco’s (the UK’s number one supermarket) and has therefore gained market share.

Asda’s success has been built not only on geographical expansion, but also on offering a better price, and more choice. These are the main goals for consumers and therefore far more likely to win repeat custom than loyalty card schemes.

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Sainsbury’s sales suffered when it could no longer offer Air Miles, although it claims that its new Nectar card has seen sales increase over the three weeks since its release. But while special offers may attract customers temporarily, only permanently low prices will allow Sainsbury’s to fight back.

Sainsbury’s is also under threat from Safeway, which has announced its intention of deliberately targeting the apparently loyal shoppers of rivals with a much more generous offer, which rewards consumers for spending over £50 (US$77.6) on four occasions. It too hopes that when consumers are exposed to its shops, prices and range of products that they will decide to make a permanent change to their shopping habits.

Safeway and Asda are currently in talks over a potential merger, a move that would create an entity with a market share almost equal to that of Tesco. If this happened, Sainsbury’s would have to compete very hard even to regain its second place market share, and loyalty cards would be of little help.

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