Credit: Craig Murphy

Tesco, Sainsbury's and Morrisons can't keep cutting prices

Asda is the only Big Four supermarket that can afford to fight on in the price war, says Moody's.

by Rachel Savage
Last Updated: 12 Oct 2015

In a price war, or indeed any war, there comes a time when losers have to lay down their weapons as the victors emerge. For the ‘Big Four’ supermarkets that moment may soon be arriving, with Moody’s warning Tesco, Sainsbury’s and Morrisons can’t afford to keep the fight going for much longer.

Aldi and Lidl are continuing their onwards march and are set to conquer a combined market share of 12-15% by 2020, the ratings agency said. In the last two years their territory has grown 54.3% and 34.5% respectively to a combined 9.3% market share, according to researchers Kantar.

Even as the large supermarkets are taking huge write-downs on mega-supermarkets they’re shuttering or never going to build, the German discounters are expanding apace. Aldi is planning to open more new shop space this year that Tesco, Sainsbury’s and Morrisons combined, all of which are also closing unprofitable stores.

Meanwhile, the Big Four’s margins are unlikely to recover in the next 12-18 months, Moody’s said, as they continue to slash prices while sales fall on a like-for-like basis. But price cuts worth hundreds of millions of pounds have already dented profits.

‘With the exception of Asda, none of the other three players have the capacity to engage in many more rounds of price cuts as they have limited financial capacity to absorb further margin declines,’ Moody’s said. And even Asda’s mega-parent Walmart may eventually decide enough is enough, with UK like-for-like sales falling 3.9% in its most recent quarter.

Sainsbury’s boss Mike Coupe tried to sound optimistic yesterday, as the supermarket reported a sixth consecutive quarter of falling sales. ‘We’re seeing underlying volume growth and underlying transaction growth,’ he claimed, ‘both of which are encouraging signs, given the deflationary environment.’

There is some light at the end of the tunnel, according to Moody’s – but not as soon as Coupe and his peers will be hoping for. ‘The UK's economic growth, rising real wages and improving consumer sentiment could support the Big Four's gradual recovery from fiscal 2016/17,’ said its vice president Sven Reinke.

By then some combatants may well have capitulated on the price-cutting front - realistically, none of them can beat Aldi and Lidl at their own game. The next phase of the war, then, will be fought over proper strategy - how supermarkets can truly differentiate themselves. So in a couple of year's time the landscape could be looking very different indeed.

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