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Supermarket price wars: A race to the bottom?
Grocery retailers in the UK have been experiencing the effects of a noticeable shift in consumer behavior in recent years. The recession, and the accompanying squeeze on incomes, has led to many consumers becoming shrewd in their purchases and increasingly looking to find the cheapest option. This has led to a climate in which discounters, and in particular Aldi and Lidl, have been able to thrive. Loyalty to supermarkets has been affected, with consumers more willing to shop around for their goods. This has had a detrimental impact on the ‘big four’ supermarkets, namely Tesco plc, J Sainsbury plc, Asda Stores Limited, and Wm Morrison Supermarkets plc.
These companies have responded to the increased threat posed by the discounters with price wars. Previous price wars among the supermarkets in the UK have tended to take place as the retailers in the middle of the market compete against one another as a marketing tool in an attempt to drive customer footfall. However, with consumers increasingly shopping round for their produce, and the quality of the produce from Aldi and Lidl being increasingly viewed as similar to, or even better than, that of the big four, the mid-market retailers are effectively being squeezed out. As described in more detail in ‘Supermarket Price Wars: A response to the rise of discount retailers’, the recent round of price wars is probably the closest the big four have come to a true price ‘war’.
The effect of cutting prices is beginning to show in profits. For the first half of the 2014/2015 financial year, Tesco saw its UK trading profit decline by 56% over the previous year, while profit before tax at Morrison’s declined by over 30% for the same period. Profit before tax was down by 6.3% for Sainsbury’s in the first half the 2014/2015 financial year. The impact of the recent round of price wars is also reflected in recent food price inflation figures. Inflation has been slowing over the past year, and for the first time in eight years food prices fell in May 2014, and has continued to do so over the following months.
In order to survive in this market, the big four may need to decide on whether they want to focus on becoming increasingly high-end retailers, or if they want to compromise quality and service in an effort to compete with the discounters. Even then they may struggle, as the discounters are increasingly gaining reputations for being good quality retailers, and furthermore, Aldi recently came out on top of a Which? survey on customer service. Companies such as Waitrose and Ocado have focused on customer service and quality, and are targeting the high-end of the market. They are remaining profitable by focusing on the experience rather than cutting prices.