Will Tesco PLC Win The Supermarket Price War?

Tesco PLC’s (LON:TSCO) resilience should make it a winner

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Tesco

There’s a whiff of war in the air: not — thankfully — in the swathe of no man’s land between NATO and Russia but in the high streets, malls and cyberspace where the supermarkets slug it out over basis points of market share.

Mobilisation

Hostilities are intensifying. Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) mobilised last month, announcing it was scrapping its long-standing commitment to a 5.2% margin. It fired an opening salvo with cucumbers, carrots and milk, ‘investing’ £200m to lower basic prices.  Last year Asda revealed a £1bn war-chest to lower prices of grocery staples.

Morrisons (LSE: MRW) has announced permanent price cuts. The beleaguered supermarket is fighting on two fronts.  With its heartland in the less-affluent North, it’s been hardest hit by the incursions of hard discounters Aldi and Lidl. It’s also under attack from disgruntled investors unhappy with its performance and late arrival to the fields of convenience stores and internet shopping.

Tensions

The peacetime state for the supermarket sector is that firms compete on price, quality, convenience and value for money. What has heightened tensions is the pressure on the four mainstream supermarkets built up over half-a-decade of austerity. On the one side, the hard discounters offering consistently lower prices, though narrower product ranges, have attracted a wider customer base. On the other side, premium-quality firms Waitrose and Marks and Spencer have developed price-competitive offerings.

What I think we’re seeing now is the growing acceptance by the mainstream supermarkets that they have to fight back on price, or the shape of the grocery sector could change significantly once consumers start to feel more confident in their spending habits.

War

It’s a gradual slide into a price war that will hurt all four supermarkets, but could ultimately see them push back against the ground won by the arrivistes. The sector is likely to be one of the last to gain from a resurgent UK economy — shoppers will benefit at the expense of investors. But in the long run a price war will secure the market position of the big four supermarkets.

Tesco has most to gain. With its near 30% market share and much bigger market capitalisation, it has deeper resources to see out a price war. Sainsbury is constrained by its lower margins and recent change of leadership, which will inhibit bold moves. Morrisons is hobbled by its geographic bias, past strategic mistakes, and activist shareholders seeking short-term profit.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

 Tony owns shares in Tesco and Sainsbury. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.

 

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