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April 6, 2005

UK: UK supermarkets: diversify or die? (COMMENT)

In a new round of supermarket price cutting, Asda and Tesco have reduced prices by a total of £167m (US$314m). Both supermarkets, which together account for 46% of supermarket spending, are advancing their position and threatening the existence of smaller and less profitable rivals as a result.

In a new round of supermarket price cutting, Asda and Tesco have reduced prices by a total of £167m (US$314m). Both supermarkets, which together account for 46% of supermarket spending, are advancing their position and threatening the existence of smaller and less profitable rivals as a result.

Wal-Mart owned Asda has prompted a new round of supermarket price wars with a series of vigorous cuts as it tries to close the gap on leading rival Tesco and maintain its status as the most affordable place to shop. Unsurprisingly, Tesco was quick to follow suit with price cuts of its own, less than 24 hours later.

The timing is particularly bad for competitor WM Morrison, which has released two profit warnings over the last month alone. Sales at its core operations are said to have dropped by 1.2% and the integration of its recently acquired Safeway stores has by no means been as smooth as first expected, making this transition a priority issue at present.

One time market leader J Sainsbury is faring only marginally better after last month reporting its first rise in underlying sales for two and a half years following an aggressive marketing campaign to win back custom. The new round of price cuts at the UK’s two leading supermarkets, however, will almost certainly hinder any additional current growth. Sainsbury will find it difficult to compete having already forsaken substantial profits in order to emulate previous price cuts of its rivals.

One factor which restricts the growth of WM Morrison and Sainsbury is their lack of non-food products, which have a propensity to provide more profitable margins than food. By contrast, Tesco, the current market leader, and Asda both have successful ranges of non-food products including clothing, electrical goods, kitchen appliances, ceramics and soft toys.

The continued diversification of Tesco and Asda has proved a lucrative strategy and is affecting not only other supermarkets, but other areas of retail also. Boots and WH Smith have seen figures hit of late proving that the giant supermarket chains are now capable of calling the shots throughout the retail industry. Retailers must now emulate the diversified strategies of Tesco and Asda or find other ways of generating profit to remain competitive on the British high street.

(c) 2005 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.

 

 

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