? Ocado drops 11% with Sainsbury's and Morrison also falling
? Tesco expected to simplify promotions by cutting prices overall
? Supermarket profits could crash if destructive war goes ahead
Fears that Tesco is set to launch a damaging supermarket price war next week have sent shares in its smaller rivals into a spin. Shares in internet grocer Ocado, which promises to match Tesco's prices on hundreds of branded goods, were hardest hit, closing down more than 11%. Sainsbury's and Morrisons also lost ground.
The UK's biggest supermarket is working on a major shakeup of its pricing that suppliers say will see it pull back from running a record number of promotions in favour of "everyday low prices" in the runup to the crucial Christmas trading period. One analyst said supermarket profits would "crash" if Tesco pressed the button to slash prices.
Despite its scale, Tesco has been outflanked by smaller competitors in recent years. New chief executive Philip Clarke admitted in its annual results in April that it "had not been leading" the supermarket pack as it had done in much of the previous decade. He promised to be more aggressive and insisted: "We can do better." Tesco has acted decisively in the past, resetting its prices in 1977 and 1994.
Customers are increasingly shopping around to save money and buying key items such as washing powder only when they are on promotion. With more than 40% of goods that go through the tills now on special offer, Bryan Roberts, director of retail research at Kantar Retail, says supermarket bosses are engaged in a "Mexican standoff". He said: "They have all got a gun to each other's head. The number of promotions has been increasing year on year, quarter on quarter. There is no longer any reason for customers to buy key things like cheddar cheese or dishwasher tablets when they are full price."
Suppliers expect Tesco to launch a form of "everyday low price" ? EDLP in industry jargon ? a pricing method favoured by WalMart-owned Asda that means fewer spectacular offers but promises shopping will be cheaper over a whole basket.
Tesco is also said to be responding to complaints that pricing had become "too complex", with products sold at multiple prices depending on the store's size or location. For example, it charges more for goods sold in its convenience chain Tesco Express. Roberts said consumers were also confused by the sheer number of deals on offer in its stores, which range from variations on buy one, get one free to petrol discount coupons and Clubcard vouchers. "You need a degree in applied mathematics to figure out what is good value in Tesco any more," he added.
Analysts say the blizzard of promotions is making it hard for shoppers to distinguish between supermarkets. With household incomes under pressure from rising living costs, the major groups have launched tit-for-tat price promotions to undermine the price claims of rivals.
Asda led the way with its "price guarantee", promising to undercut all its mainstream rivals by 10% on a basket of groceries, and last month Sainsbury started trialling a "brand match" price promise in Northern Ireland which automatically generates a coupon at the checkout if customers could have bought the branded products in the basket more cheaply at Tesco or Asda.
Tesco store managers have been told to report for work on the Sunday before Monday's launch, which is also expected to incorporate the supermarket's Christmas marketing push.
Analysts expect the shakeup at Tesco is expected to involve a substantial investment and, given rivals will be forced to respond, warn that could hit rivals especially Sainsbury's which is the UK's third largest supermarket. Its shares closed down more than 2% at 274.5p.
Evolution analyst Dave McCarthy said industry profits would "crash" if Tesco reset its prices ? but its deteriorating performance made such a move increasingly likely. "It is very clear that Tesco has the greatest capability of winning a war. Some commentators say price wars are in no one's interest, but this is blatantly untrue as wars and price repositionings do happen and they are in the interest of the company that is best geared towards winning the war."
Source: http://www.guardian.co.uk/business/2011/sep/21/tesco-price-war-threatens-supermarkets
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