UK: Food wars - competition in the supermarket sector. (2 of 5)

UK: Food wars - competition in the supermarket sector. (2 of 5) - Sainsbury's Tom Vyner, a fiesty enthusiast in love with his trade, does not shy away from criticism. Seizing the opportunity, he pulls out charts showing that - on the basis of a Sainsbury

by
Last Updated: 31 Aug 2010

Sainsbury's Tom Vyner, a fiesty enthusiast in love with his trade, does not shy away from criticism. Seizing the opportunity, he pulls out charts showing that - on the basis of a Sainsbury customer's typical shopping basket - his stores have a 1.5 to 2% price advantage on Tesco, and even more on other national retailers, excluding the discounters.

Vyner says that the 7.7% net profit margin that the Sainsbury group gets has to be higher than abroad because the store sites here are twice as expensive. "The biggest slug (of the margin) goes to buying land and building stores," he points out. The Sainsbury-owned Shaw's retail food chain in the United States operates on less than half the UK margin and yet, because sites are cheaper, has a similar return on capital. "So we're not profiteering in this country compared to elsewhere in the world."

International property agents confirm that sites are much pricier here, mainly because of severe planning controls. And indeed, good capital returns and speedy growth can only be applauded, particularly where it is due to excellent management. But the question of whether customers themselves are subsidising this high rate of growth because of a lack of open price competition is not so easily disposed of.

Corporate Intelligence Group director and researcher Robert Clarke is of the view that higher land prices are only a part of the story of high profit margins here. "There is a lot of shadow boxing about price. But price competition is not real," he says. "The multiple (chain retailers) oligopoly in the UK means there is not the incentive to be particularly competitive on pricing. That is another reason they have silently pulled up their prices in the '80s and early '90s."

The likely reality lies not in any sinister collaboration on prices but, as Clarke notes, in the simple lack of incentive to contain prices. The major groups like Sainsbury and Tesco, which might most afford keener prices, are doing very well, with 20-25% plus per annum profit growth and capital returns of over 20%. And as Hoare Govett analyst Bill Currie remarks: "It's in no one's interest to drop pricing, because the others follow so quickly and there's no advantage."

The large but lagging groups like Asda and Gateway need every bit of their margin to build more stores and maintain market share - as, it could be argued, the top two do also. Says Currie: "The competition here (as compared with the US) is on a different footing. It is in terms of sites, not prices." This issue is a key one.

After the ravages of the late 1970s price war, large UK retailers did indeed change their focus, openly saying that they "never wanted to see a price war again". This is understandable, but the drama of words like "price war" must not be allowed to obscure finer issues. Most important of these, the food market is unquestionably less free flowing than it used to be.

In the 1960s Britain was dotted with thousands of smaller stores that had to fight on every corner for their customers. Since then, according to Independent Grocers Association national secretary Alan Taylor, the number of independent grocers has been slashed by two thirds. Verdict Research estimates that 100,000 grocery shops have disappeared in 30 years and that 53% of the grocery business now goes to the big four companies. These figures are elastic, mind. As Sainsbury points out, when all food stores are counted (butchers, bakers, etc.) and retailers' petrol sales are taken out, the top four have only one third of the market. Nonetheless, shops are bigger, fewer and owned by a select few.

It was the speed of this trend in the past decade which makes the next one so interesting. Today some city shoppers have a choice of two or three supermarkets, while smaller communities without one are getting rarer. Thus three priorities are now the obsession of major retailers: location, location and location.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today