Supermarket price war could bring consumers some relief but only because the government is pushing up costs

Sky News

18-03-2025

The air is suddenly full of talk about supermarket price wars.
Some £4.4bn was wiped from the stock market valuations of Tesco, Sainsbury's and Marks & Spencer on Monday following comments from Allan Leighton, the executive chairman of Asda, on Friday in which he promised the grocer was planning its biggest price cuts in 25 years.
Mr Leighton, who returned to Asda last November, said there was a "war chest" available to Asda and indicated he was prepared to "materially" forego profits in the short term to win back market share.
He told The Times: "We have a long way to go. We're three months into what is going to be three years of really getting the basics of the business right and getting the business to outperform the rest of the industry on a like-for-like basis.
"That's what restores our market share and profitability. It ain't going to happen overnight."
Those remarks are rightly being taken seriously by investors - by the market close on Monday Tesco shares had fallen by nearly 15% since Friday morning and those of Marks & Spencer and Sainsbury's by 10% and 9% apiece.
That is because nobody, arguably, knows Asda better than Mr Leighton.
What's gone wrong at Asda?
It was he, along with current Marks & Spencer chairman Archie Norman, who rescued Asda from collapse in the early 1990s before selling the business to US giant Walmart in 1999.
Initially, that transaction appeared to go well, with Asda wresting the number two slot in the UK grocery market from Sainsbury's in 2003.
But Walmart's insistence on preserving margins gradually saw its share eroded and the number two slot recaptured by Sainsbury's.
By 2019, it was clear Asda was no longer regarded as a core asset by Walmart. That was the year an attempt was made, blocked by competition regulators, to merge the business with Sainsbury's.
Worse was to follow.
In October 2020, Walmart offloaded a majority stake in the grocer to the petrol forecourts billionaires Mohsin and Zuber Issa and the private equity firm TDR Capital.
The debt taken on during the takeover blunted Asda's competitiveness and resulted in it losing market share - mainly to Tesco and Sainsbury's but also to the German hard discounters Aldi and Lidl.
It went through a series of managers before TDR Capital bought out Zuber Issa in June last year to take a majority 67.5% stake while Mohsin Issa, who retains 22.5% of the business, relinquished the day-to-day running of the business.
A new era
Cue the return of Mr Leighton.
Within weeks, after Asda was the worst-performing supermarket over the Christmas period, he had announced a 'Big Jan Price Drop' price-cutting campaign which saw average price reductions of 26% on selected products.
That was dismissed by rivals, most notably Ken Murphy, the chief executive of market leader Tesco, as not representing a genuine price war.
Mr Leighton's response has been to reintroduce the 'Rollback' price-cutting promotions he and Mr Norman introduced in the 1990s in a bid to revive the spirit of the old 'That's Asda Price' campaigns, complete with shoppers patting their back pockets, backed by heavy newspaper and television advertising.
It is being seen by industry experts as a wider price-cutting initiative than the more limited campaign Asda had been running to 'price match' Aldi and Lidl.
While the price cuts are the most eye-catching initiatives, so far as consumers will be concerned, Mr Leighton has also spent £43m on extending opening hours for some stores and has also bolstered his management team.
The most important hire was David Lepley, the group retail director at Morrisons, who was appointed in February as chief supply chain officer - a recognition that Asda needed to sharpen up on its product availability.
Can the new boss work his magic again?
The big question many in the industry have is whether Mr Leighton - who has since leaving Asda in 2000 had a spell as chairman of the Co-op - can work his magic again.
The grocery market now is very different from the one in the 1990s when Tesco was only in the foothills of the explosive growth it was later to enjoy, first under Lord MacLaurin and then under Sir Terry Leahy, while Sainsbury's was going through a fallow period.
Morrisons, which acquired the old Safeway chain in 2004, was also a much smaller business than it is today.
Moreover, in the 1990s, the hard discounters Aldi and Lidl - who entered the UK in 1990 and 1994 respectively - had a miniscule market presence.
Hard discounting in grocery retail was also less developed than today with the old Kwik-Save chain its leading exponent.
In other words, the climate was ripe for a player like Asda to seize share with big, well-targeted price cuts, snappy advertising and, crucially, excellent product availability.
Compare that with today.
A different time
Tesco's market position is as dominant as it has ever been while Sainsbury's is a strongly entrenched number two in the market and a revived Morrisons, under Rami Baitiéh, has also returned to growth.
Aldi and Lidl, although the former has recently seen its market share slipping, also remain formidable competitors.
Tesco and Sainsbury's, who have benefited more than anyone from Asda's travails, have the most to lose in the event of a turnaround. But they are also better placed than anyone else to withstand one: Tesco's Clubcard is arguably the world's most successful supermarket loyalty and rewards scheme and provides the grocer with data and insights that no one else has, enabling it to react rapidly to changes in the market or to shopper habits.
Sainsbury's is trying to do something similar with Nectar, while both schemes are increasingly able to personalise offers to individual customers, entrenching loyalty.
That may become even more important if, as Simon Roberts, Sainsbury's chief executive, asserts, the 'big weekly shop' is becoming more important as working from home becomes less common.
Tesco and Sainsbury's sharper than they used to be
As the renowned sector watcher Clive Black, analyst at investment bank Shore Capital puts it: "We need to remember that the listed players are better grocers than Asda with a broader customer set, stronger balance sheets and a will to remain competitive".
He points out that, apart from the advantages bestowed by their loyalty programmes, Tesco and Sainsbury's are sharper on price than they used to be, are able to price-match Aldi meaningfully and offer better ranges and more choice than both the German pair and Asda.
That view is shared by the retail team at brokerage Jefferies which has questioned whether Asda's price cuts can deliver the increase in grocery volumes in the time it requires without a fresh injection of capital from shareholders.
What about consumers?
Will this be good news for consumers? Possibly.
But the grocery sector will be hit hard by the forthcoming increase in the national living wage and, more especially, the rise in employer's national insurance contributions announced by Rachel Reeves, the chancellor, in her autumn budget.
Those measures will not only push up the costs of supermarkets but also those of their suppliers. Those higher costs will at least be partly passed on to customers.
So too will be the cost of implementing new recycling regulations due in October.
And, all the while, food price inflation is picking up in staples such as eggs, milk and butter. The British Retail Consortium is expecting food price inflation to be north of 4% during the second half of this year.
Accordingly, while Asda's price war may bring some relief, it feels more likely at present as if it will merely result in lower price rises than British shoppers would otherwise have experienced rather than an outright drop in prices across the board.