Tesco’s big price drop risks sector stability, analysts warn

David McCarthy and Andrew Porteous of Evolution Securities were speaking in response to Tesco announcing a major shift in it price positioning strategy yesterday, which will see prices slashed on around 3,000 lines, including many basket staples.  

The city analysts said that the £500m investment was the right move for the retailer and would help the company get onto the front foot. It said that its previous pricing policies had been ineffective, as the retailer was out of sync with its customers wishes. They said that customers had not valued the double Club Card points system and that by ending it, the retailer could make £300m of savings.

By being the first of the major retailers to set a new pricing strategy, Tesco would benefit through being the retailer to set the new price levels, choose the specific product to be cuts and get first run at suppliers, as well as being seen by the consumer to take the lead on prices. They said that the other supermarkets would have to follow suit.

They said: “Tesco is a dominant market leader with significant economies of scale and should be much cheaper than the competition. However, in recent years, Tesco has increased its underlying UK operating margin and moved from being a sales-led retailer to being more margin led. With Asda and Morrison’s being sales-led, this was a strategic mistake by Tesco.

“Our only issue is whether £500m is enough. If it is not, then Tesco will have an issue in convincing customers it is cheaper. This kind of launch is really a one-off, and Tesco would lose credibility with consumers and investors if it has to relaunch with another £500m in 6 months.

“It is too early to say  whether this move is the start of the end of the capital war. It will take some time before we know if this is leading to a permanent reduction in profitability for the industry.”

Tesco UK chief executive Richard Brasher said: “We’re giving customers a more straightforward shop - reducing the number of promotions and putting the emphasis on clear and reliable savings that everyone can benefit from.

“To ensure we make the biggest change we can for customers, we’re going to make a change to Clubcard, ending the double points promotion and returning to one Clubcard point per pound spent.

“Clubcard is an important thank-you for customers. They enjoy being rewarded for their loyalty with Clubcard points they can spend later. But they’re saying very clearly in these difficult times, that they also want more immediate savings at the checkout.

>Sainsbury's position is vulnerable

>Analysts warn of weak growth in retail sales

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