Britain’s biggest retailer, Tesco, issued its first profits warning in more than 20 years on Thursday, following a poor festive trading period – and a pledge to reinvest profits in its UK business, particularly through its Big Price Drop initiative, which saw thousands of items reduced in cost in the run-up to Christmas.
Analysts and retail consultants believe that other supermarkets will be forced to follow suit in a bid to retain customers, resulting in vastly reduced costs for shoppers and a battle to provide the best customer experience.
“Tesco have realised that they can’t rest on their laurels and need to focus their effort on the UK business,” said Richard Hunter of Hargreaves Lansdown Stockbrokers.
“They clearly lost the Christmas battle, but they haven’t necessarily lost the war. Tesco underestimated the power of the discounts offered by its competitors, but it knows it now,” he added
“They will have to reduce their prices further and their competitors will inevitably follow suit – but to do that, they are all going to have to streamline operations elsewhere.
“That will provide big challenges for other supermarkets which don’t have the resources of Tesco to keep up. It is going to be a very interesting 12 months – and if there’s going to be one winner in all of this, it is going to be the consumer.”
Food prices have spiralled in recent months, as consumer price inflation peaked at 5.2 per cent in September. It now stands at 4.2 per cent – higher than last December – according to the latest figures from the British Retail Consortium.
Gordon Emslie, a retail specialist at GNE Consulting in Falkirk, said he expected a bitter price war to commence, but warned that shoppers were unlikely to see a return to the low supermarket prices of 2008.
“It is going to be a very competitive year for food retailing,” he said. “Tesco will have a lot of work to do to embed the price drop they have already done – the message from chief executive Philip Clarke yesterday was that that really hadn’t got through.
“Before Thursday, the boards of Sainsbury’s, Morrisons and Asda will have had an inkling of what was coming and they will either have a war chest ready to cover price cuts – or will have been looking at how they can maintain their market share.”
He added: “I think there will be some repositioning, but I don’t think we’ll see food prices revert to what they were three years ago – due to a high demand for commodities from the Middle East pushing costs higher.”
It is believed that in addition to lower prices, the superstores will also be forced to up their game in terms of customer service and the overall shopping experience, in a bid to win customers.
“Asda has won in terms of the price message – that is something they have been hammering home for some time,” said John Ibbotson, managing director of retail consultancy Retail Vision. “On the other hand, while people never see Sainsbury’s as cheap, they do see it as a good customer experience. Tesco is going to need to invest in its stores and also in things such as coupons, to draw customers back in. The other supermarkets will also need to make sure they stay in the game.”