Sainsbury hits back at Tesco's £500m 'Big Price Drop', but will supermarket shares suffer?
With one pound in every eight spent on the high street going into the tills of Tesco (LSE: TSCO), rival retailers dread every new campaign that the supermarket Goliath launches.
The 'Big Price Drop'
On 22 September, Tesco fired its latest shot in the never-ending war between supermarkets. It unveiled the Big Price Drop, a £500 million campaign to cut the price of 3,000 everyday staples, including milk, bread, fresh fruit and vegetables.
Within days, big rival Sainsbury (LSE: SBRY) hit back, warning that Tesco's latest campaign was accompanied by £350 million of cuts to its Clubcard loyalty programme. Thus, Tesco customers would be better off only by £150 million and not the headline-grabbing half-billion pounds.
Sainsbury launches 'Brand Match'
Of course, it was only a matter of time before Sainsbury (current slogan: 'Live Well For Less') responded with a price-cutting campaign of its own.
From this Wednesday, Sainsbury will introduce its 'Brand Match' promotion, which will match the prices of Tesco and ASDA on certain key products. To do this, Sainsbury will provide customers with coupons to cancel out the difference between its prices for branded goods and those of Tesco and ASDA.
To qualify for this Brand Match offer, Sainsbury's customers need to spend £20 or more, and all coupons handed out must be used within two weeks. Sainsbury recently tested this promotion at its stores in Northern Ireland, before rolling it out UK-wide.
Troubling times
Clearly, in this new age of austerity, retailers are desperate to keep loyal shoppers spending, as well as to attract new customers. With the cost of living rising by between 4% and 5% a year and wage rises subdued, disposable incomes are falling at their fastest rate since 1921.
Indeed, Tesco last week revealed its first fall in UK like-for-like sales in 20 years, down 0.7% excluding petrol and VAT. Even so, Tesco's overall revenues rose by 7.8%, thanks to a strong performance from its overseas operations. Sainsbury fared better in the UK, reporting like-for-like sales growth of over 1%, but remains a distance third in the UK's league table of supermarkets.
Should shareholders be worried?
In my view, shareholders in these battling retailers should lose no sleep over these latest shots in the battle for high-street spending.
Indeed, these and similar price-cutting campaigns can largely be dismissed as nothing but marketing gimmicks. Cutting £150 million from its revenues is a drop in the ocean for Tesco, while Sainsbury executives know that perhaps half of the Brand Match vouchers it issues won't be redeemed.
In short, both campaigns are aimed at grabbing shoppers' attention and winning headlines, but will do little to reduce the cost of a weekly shop. In fact, one survey conducted before last Christmas found that the majority of such price cuts amounted to a mere penny per item!
Valuations
As I write, Sainsbury shares are up a penny at 293p, valuing the group at £5.5 billion. They trade on a forward price-earnings ratio of 10.8 and offer a forecast dividend yield of 5.4%, covered 1.7 times.
Tesco shares are trading up 3p at 408p, valuing the UK's biggest grocer at £32.7 billion. They trade on a forward price-earnings ratio of 11.4 and offer a forecast dividend yield of 3.8%, covered 2.3 times.
Hence, value investors and dividend devotees will probably favour Sainsbury as a potential takeover target, while fans of big brands and market dominance will go for Tesco. Of course, you could hedge your bets by buying a bit of both...
More from Cliff D'Arcy:
> The Motley Fool owns shares in Tesco.
