Grocery competition saves shoppers billions
squeezed grocery prices, saving consumers £3 billion in shopping
bills but impacting on suppliers' profitability, according to new
research by Verdict.
Intense pricing competition, originally initiated by market-leaders Tesco and Asda in the late 1990s, has produced two consecutive years of deflated grocery prices - and the trend is set to continue next year, the London-based analyst predicts.
Although the price squeeze is pressuring suppliers, customers look set to benefit by more than £3bn by the end of 2006.
"So far the lower prices have saved the UK consumer more than £1bn in 2005 compared with 2003, and the annual savings will increase to £1.7bn in 2006, with forecast food and grocery deflation of 0.6 per cent - meaning food and grocery will cost 2 per cent less than in 2003," said Verdict senior analyst Gavin Rothwell.
He cites the Morrison-Safeway acquisition as a major deflationary force in the industry.
As more and more Safeway stores are consolidated under the Morrisons banner, and take on the retailer's traditional price-slashing strategy, Asda and Tesco are lured further into the price war.
"Tesco, Asda and Morrisons are well known for their strong price agendas," said Rothwell.
But the Morrisons acquisition of Safeway has shifted the focus of former Safeway stores to a more price-led platform, with Morrisons transferring its low prices to it's enlarged store base. Tesco and Asda have responded with price cuts of their own."
The acquisition has also intensified competition by instigating a consumer lag as many ex-Safeway shoppers to move away from the new Morrisons format.
As a result there is a far larger proportion of customers up for grabs than usual, argues Verdict.
But this could spell disaster for the British supply chain, already under strain from rising fuel and commodity costs through oil price hikes.
And rising packaging costs will put further pricing pressure on food processors, especially the smaller ones, as their margins are hurt by price wars among retailers.
Farmers For Action chairman David Handley says he has watched the grocery sector expand into what he calls a "retailing dictatorship", claiming price wars between the top three or four supermarket chains have forced staple food prices so low that many farmers have gone out of business.
And other lobbyists want to see the introduction of legislation similar to that in Germany, to stop British supermarkets selling goods at lower than the cost of production - but this is unlikely to happen in the near future.
Robin Webster, supermarkets campaigner at Friends of the Earth, explained: "The code was written by supermarkets for supermarkets. This needs to be looked at - it needs to be made mandatory and given teeth."