Last week, supermarket chain Asda slashed prices across 1,500 of its products by as much as 45 per cent.
The move kicked off the beginnings of a price war among supermarkets, as the UK’s third biggest supermarket looks to win back customers, having seen its market share fall to 12.6 per cent from 13.7 per cent over the past year.
Asda has now slashed prices on 10,000 products since the end of January, with its new chief executive, Allan Leighton, promising he will ‘continue to invest in lowering prices across the rest of the year and beyond’.
Cuts to the price of staples at the checkout are good news for shoppers, but it isn’t such good news for Asda’s competitors, or shareholders in these firms and as a result, share prices in the three listed companies plummeted.
Shares in Britain’s largest supermarket, Tesco, slipped 13.5 per cent between 13 March and 19 March. At the time of writing, Tesco shares were trading at 332.3p.
Price war: Product prices at the checkout are likely to fall across the board as Asda slashes 1,500 prices
Meanwhile, Sainsbury’s shares dropped 8.8 per cent between 13 and 17 March. Shares are currently trading at 237.8p.
M&S shares fell 9.1 per cent over the same period and are trading at 340.9p. While not strictly a supermarket, a big chunk of its sales do come from its grocery division.
This year so far, the three firms are down 10.9 per cent, 14 per cent and 12.8 per cent respectively.
The highest the Tesco share price has ever reached is 606.7p in November 2007, so is has fallen 45.2 per cent from its peak.
Sainsbury’s peaked at 587.50p in July 2007 and M&S 699.62p in May 2007. It means they have slipped 59.5 per cent and 51.3 per cent from their peaks respectively.
How will a price war affect share prices?
If the share prices of competitors are anything to go by, investors are under the impression there is a rocky period ahead.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘The companies have struggled to recover from the hit to confidence indicating that shareholders are expecting a period of intense competition.’
Combined, the firms saw £4.1billion off their value wiped off in just a few days.
Dan Coatsworth, investment analyst at AJ Bell, said: ‘The prospect of a fierce price war which will kibosh any plans to pass on wage and National Insurance increases.
‘Profit margins could weaken, leading to analysts downgrading earnings forecasts and share prices falling further.’
The supermarkets also need to compete with the likes of unlisted Morrisons, Lidl, Aldi and the Co-op.
‘Morrisons is closing services seen as nice-to-have but not essential and scaling back its convenience footprint as it readies for the round of cost-cutting from rivals.
‘The Co-op has just revealed it’s investing more than £70 million into matching prices with Aldi on 100 everyday essentials,’ Streeter said.
How will the listed supermarkets react?
The fall in supermarket share prices aren’t necessarily an indicator that Asda will win out in any price war, according to Clive Black, head of consumer research at Shore Capital.
‘Asda has put the cat amongst the pigeons in terms of pricing rhetoric, which has concerned the market about the danger of a price war, which could impact gross profit margins and so earnings for the listed supermarkets,’ Black said.
He added: ‘The key word here though is “could”, because we are not in a price wars yet… Asda’s competitors will not be sitting on their hands, as we argue, having being forewarned, and in the main they are well set up to adjust, and better set up in truth than Asda.’
These supermarkets aren’t going to sit by and allow Asda to steal their market share.
Currently, Tesco holds 28 per cent of the market and Sainsbury’s 16 per cent, whereas Asda has 13 per cent.
Tesco, Hunter says, is better prepared to weather the storm.
He said: ‘Despite the share price dip, Tesco has risen by 12 per cent over the past year and remains the sector favourite, with a market consensus of a buy.
‘Its sheer scale feeds its appetite for lowering prices for customers through the likes of Aldi Price Match, Low Everyday Prices and Clubcard Prices, while a strong focus on significant cost reduction creates something of a virtuous circle.’
Sainsbury’s, meanwhile, is facing increasing consumer demand for cheaper non-essentials, with competitors focusing on the space.
Hunter says this ‘has somewhat left Sainsbury trailing and with potentially more to follow.’
He warned: ‘Sainsbury could perhaps be more of an initial casualty.’
Is M&S an outlier?
Marks & Spencer is something of its own beast.
The retailer has lent into its food business, having grown its market share in recent years, but it still only makes up one aspect of a business model that is primarily focused on its fashion ranges.
Even so, M&S’ premium offering has so far proven a success, even as competitors cut prices.
‘It’s entering this intense period of competition is a robust position, given that food revenue was up almost 9 per cent, helped by a 6.6 per cent uplift in volumes,’ Streeter said.
Interactive Investor’s Hunter agrees. He said: ‘The food business has also cemented its position as a core contributor to the business as a whole, led by its innovative and popular ranges… there has also been a noticeable increase in customers choosing M&S for their full shop.’
This is by no means a home run though, with Streeter warning: ‘[Recent cost savings keeping food prices down] had been helping to attract more families, who on average spend more on each shop, but there is the risk that these new customers could be lured away amid greater competition.
Is this a buying opportunity?
Investors might be wondering if now is the time to buy the dip.
Perhaps not, Coatsworth says, warning: ‘Sainsbury’s, Tesco and M&S were all bullish last year as they were fighting off competition from discounters Aldi and Lidl and doing incredibly well.
‘It could be hard to sustain momentum in 2025 and recent share price weakness is the market’s way of saying the shine is coming off the sector.’
Even so, there could be shine left, and a behemoth like Tesco, Hunter said, is still in a strong position.
‘Its sheer scale feeds its appetite for lowering prices for customers through the likes of Aldi Price Match, Low Everyday Prices and Clubcard Prices, while a strong focus on significant cost reduction creates something of a virtuous circle,’ Hunter said.
Streeter added that the firm’s ‘deep-rooted supplier relationships and free cash pumping around the business, should ensure it stays relatively resilient in these price skirmishes, particularly if they become drawn out.’
Sainsbury’s too is not going to back down from the fight.
Streeter said: ‘Nectar prices and Aldi price matches are working at plugging the exit of customers, and it’s also upping the ante with its premium Taste the Difference range to spark more appetite among more affluent shoppers.’
Nectar prices are expected to provide £100million worth of incremental profit over the next three years.
‘Full-year guidance was for underlying retail operating profit to grow around seven per cent to just over £1billion, but the company will have to pedal hard to keep that target in sight,’ Streeter said.
M&S should benefit from its strong diversification away from food retail.
Even then, Streeter argues M&S Food’s ‘bread and butter’ will still come from customers who are ‘more likely to have paid off their mortgage and so have higher disposable incomes, so should keep it more resilient, even if shoppers tighten their belts further.’
Hunter said: ‘M&S has no intention of resting on its laurels and has articulated an ambitious next leg of growth, and the market consensus of the shares as a buy echoes the optimism for prospects.’
Black said: ‘I would say M&S, Sainsbury’s and Tesco shares look oversold and, as such, they are a buying opportunity for investors.’
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