analysis | Tesco’s advantage in the British Food Wars

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UK food prices are rising at the fastest rate in over a decade. The UK’s top four supermarkets are trying to pass on their own inflation by charging higher prices. But they must be careful not to fall into a crisis. As they did during the Great Depression, they put customers into the arms of the humble supermarkets Aldi and Lidl. This was a disaster for the mainstream grocery sector and a boon for German startups.

Food price inflation reached 5.9% in the four weeks to April 17, the highest level since December 2011, according to data provider Kantar. As Bloomberg News colleagues have reported, rising raw material prices, rising labor costs and Brexit are all fueling fears that the era of cheap food is over.

When food prices last surged 10 years ago, the so-called four largest supermarkets: Tesco Plc, J Sainsbury Plc, Asda Group Ltd and Wm Morrison Supermarkets Ltd were miscalculated. They have raised prices throughout their stores due to special offers funded by large brand manufacturers.

In contrast, Aldi and Lidl branches in the UK offered permanently lower prices. After arriving in the UK 10 years ago, the discount store honed their range. For example, it added more fresh food and fine wines to appeal to the cash-strapped middle class. The four biggest companies were belatedly cut prices, but they made billions of pounds in profits.

There are a few signs that things will be different this time around. UK-based grocers have moved away from yo-yo-like high prices and promotions to focus on cheaper and more stable prices. According to data provider NielsenIQ, approximately 21.5% of shopping carts were purchased through promotions in the four weeks leading up to April 23rd, compared to 35% in 2012. Both Tesco and Sainsbury compare hundreds of prices to Aldi. Tesco also leverages the power of the Clubcard loyalty program to offer special offers to over 20 million members.

Hypermarkets with a wider range of products and a larger parking lot can afford to buy more expensive than the value chain, but not so much. Inflation in commodity prices is so high that no one, including discount stores, can escape the pressure. However, if the differential is widened, the Big 4 will once again run the risk of customer churn.

Already more shoppers are visiting Aldi and Lidl. Some of this is a recovery from an epidemic in which some Britons have avoided a limited range of small supermarkets. Two German companies also continue to open stores, while four are adding few new locations. But this is more than just easing epidemic habits. According to NielsenIQ, in the four weeks through April 23, around 41% of households shopped in Aldi while 34% shopped in Lidl, indicating that more families are now using the chain for their weekly needs.

Aldi and Lidl were the only food retailers to report year-over-year revenue growth for the 12 weeks through April. According to Kantar 17. If current trends continue, Aldi could overtake Morrison to become the UK’s 4th largest supermarket in the next few years.

Despite these pressures, Tesco looks best suited to weathering the inflationary storm. It has been gaining market share for over a year, and this is the first time in years. Finally, when food prices soared, Tesco invested heavily in its US business, leaving little room to cut costs to its customers. Now, Tesco has reduced its international presence and strengthened its balance sheet. As the UK’s largest retailer, the company also has the greatest influence with suppliers that enable the best deals.

Still, Tesco needs to see complaints on social media about special offers that are only available to Clubcard customers. This could be a harbinger of backlash.

Morrison and Asda recently announced a price cut campaign. Both were recently acquired by a private equity group and have no quarterly reporting restrictions. It should give them more space to maneuver.

However, after being acquired by Clayton Dubilier & Rice LLC for £7 billion last year, Morrison will have debts of around £5.5 billion ($6.7 billion). The situation is similar for Asda, which was acquired mostly by billionaire brothers Mohsin and Zuber Issa last year and private equity group TDR Capital for £6.8 billion. They financed the purchase with approximately £4 billion in debt. The question is whether the company has the financial power to respond to the rise in consumer prices following the interest rate hike.

That’s why Tesco needs to take the lead and be more aggressive in lowering prices. It is in the strongest position since the heyday of Terry Leahy, who served as CEO from 1997 to 2011 and has a once-in-a-lifetime opportunity to injure two privately owned rivals. The new CEO, Ken Murphy, who has been there since October 2020, has been reluctant to start a price war. He shouldn’t wait too long. Tesco may not have an advantage forever.

Additional information from this author and others Bloomberg comments:

• Technology CEOs can’t ignore stock prices: Trung Phan

Peloton’s Wheel of Fortune Falls: Andrea Felsted

• Industry demand could finally slow: Brooke Sutherland

This column does not necessarily reflect the views of the editorial board or Bloomberg LP or its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer goods and retail industries. She was previously a reporter for the Financial Times.

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