Supermarkets: price wars or cartels?

Sacrificing profits in the name of maintain customers and share.  Is it that simple?

Asda announced earlier this year that it would prioritise volume over profits, causing a subsequent drop in share prices for all of the major supermarket chains over fears of a summer price war.  So did this actually transpire?  And more importantly, do you need across the board price reductions to capture customers, or just eye catching offers on small number of products?

Looking a stock prices of major UK supermarkets, all had a large dip on 6 July following the Asda price war rumours.  It’s the second syncronised dip in the chart shown below (the first is Brexit!).  However all the valuations subsequently recovered, with Morrison’s doing the best of the bunch over the last 3 month.  So it would seem Asda’s pursuit of share didn’t have particularly long term valuation consequences for the industry?

supermarkets

A lot of price-warring is about capturing the public imagination, and getting shoppers to feel subjectively that they are getting a good deal.  All of the UK supermarkets talk endlessly about price.  However most people don’t take the time to scientifically analyse if they are getting a genuine “bargain” across their entire basket of products, so they probably compare on a small number of commodity benchmarks (milk, digestives, etc).  So some strong headlines, and some eye catching offers, can be a good way to give customers the emotional edge.  Perhaps this was Asda’s aim in their announcement?  Or is that assuming far too many of their customers would read or care about headlines in the financial pages?

Over the last decade there has been increased fragmentation of supermarket share of wallet.  The Big 4 (Tesco, Sainsburys, Asda, Morrisons) have been under increasing pressure from discounters (Aldi, Lidl, etc), and it has become a lot more common place for people to multi-shop, for example with weekly trips to a Big 4 and fortnightly trips to a discounter for a bulk items.  Give that discounters stock on average about half to a third of the variety of products, they can offer significantly lower prices on the products they do carry due to higher inventory efficiency and a smaller supplier base to manage.  It’s the rise of Walmart all over again! (Wait, who owns Asda?)  Willingness to multi-shop undermines the loss leader strategy to some extent.

It’s a commodity market, but it’s not perfectly efficient.  Despite the marketing, 3 of the Big 4 are pretty much a coin toss apart on average basket price, with Asda staking out the the lower price / quality end.  Between the 3, most customers can’t tell the difference and the average price basket difference isn’t really exciting enough to swap custom.  So most people go to the most convenient or largest option nearby.  The differentiation from the discounters is the range of choice that enhances their shopping experience while minimising the supermarket’s waste in extra inventory carry costs.  And of course Waitrose and Ocado rule the quality and upper-income end of the spectrum.

So market share ultimately comes down to price / quality perception, location convenience, size, reliability and any value-added extras that reinforce the overall package (e.g. on-site dry cleaning, saving another inconvenient trip).

All of the Big 4’s strategies seem to involve “investing” to deliver “sharper” and “keener” prices.  So actually there is no price war, just everyone trying to run as efficiently as possible while introducing added value lines, internet options and trying to get the best locations.

So no need to panic then.