Only a couple of the 20 or so suppliers we spoke to this week had been summoned to Tesco HQ in the wake of its Big Price Drop initiative, which launched Monday. But few are in doubt that the call will come.

“It’s hell already and it’s going to be even more hell,” predicted one veteran.

“Somewhere down the line I know they are going to put a gun to my head,” said a worried managing director, while one supplier simply said: “It’s like waiting to be called into the death chamber.”

The subject of the doom-laden talk was a series of crunch meetings with the UK’s most powerful retailer. The question on everyone’s lips: who will bear the brunt of Tesco’s £500m Big Price Drop campaign, which slashed the cost of 3,000 products from cheese to onion rings to pineapple chunks in the first wave of what Tesco promises will be an indefinite strategy of lowering prices?

On the first day of the price cuts, Tesco was no doubt hoping to allay fears that its supply base would be squeezed when it announced that it was increasing the funding it gives dairy farmers for milk. But behind the scenes other producers of fresh products, where many of the price reductions are concentrated, spoke of being caught “on the hop”.

“There’s great pressure on these kinds of products already and Tesco’s price war is only going to heighten it, especially if other ­retailers start price-matching,” says one source, adding: “We could potentially end up with a bloodbath.”

Even on the branded side there are fears. “In the short term, we will see an uplift [in sales], but we live in a world where this is going to be very short-lived,” says the MD of one household-name food supplier, which has seen more than 20% slashed off the prices of its products.

“It makes me smile when Tesco says this is to be funded by the ­redistribution of Clubcard points and the investment it’s made in ­efficiencies,” he adds. “As far as I can see, only pain can come from this. We have had no advanced warning, no indication this was to come, but [Tesco] will very quickly re-establish the price of our products and re-value our brand.”

Excitement
Tesco, in contrast, claims suppliers it has spoken to so far in its round of talks “share our excitement” over the offensive and are willing partners. “We have good working relationships with suppliers, which in the majority of cases go back many years,” says a spokeswoman. “If the Big Price Drop is well received by customers, then they [the suppliers] will benefit, too, as we will sell more of the products they supply.

“We will be sharing our vision with lots of suppliers over the next few weeks and based on our conversations in the past couple of days, we are delighted.”

Analysts predict global suppliers such as Unilever and P&G will easily accommodate Tesco’s demands. “For some of these companies, the UK is less than 10% of their global sales,” says Investec analyst Martin Deboo. “What the experience of the past four years has shown us is that these companies’ ability to ride out price wars is not to be ­underestimated.”

But marketing consultant and former Unilever veteran Andrew Marsden says the same will not be true of smaller fish. “Buyers and ­retailers will be sniffing for fear,” he says. “They know there’s blood in the water. The effect of this is going to be felt across the market and I’m sure we’ll see smaller suppliers getting into difficulty.”

Yet does the reality of Tesco’s Big Price Drop really justify the pessimistic predictions of suppliers or the hype it is getting in the national press for cutting prices on behalf of hard-up Britain? Is Tesco merely sharing the pain more evenly?

Research for The Grocer by BrandView.co.uk shows Tesco dropped the price of three times as many products this week as in the previous six weeks, with 2,911 prices lowered and 351 up. But the average price reduction was ­actually much lower this week (12%) than in previous weeks, when it was 22%.

In the meantime, in the latest Grocer 33 price survey, Asda’s basket was still some 8% cheaper than Tesco’s and, unusually, Sainsbury’s basket was also cheaper.

These findings help to explain why a number of suppliers we spoke to admitted to not losing sleep over Tesco’s price blitz. “This is a well-publicised spike [in a trend that] has been prevalent in the industry since the recession began,” says Finsbury Food CEO John Duffy. “The truth is it’s just more of the same.”

Another high-profile Tesco supplier adds: “Tesco was looking for a big, headline-grabbing campaign. I think it’s inevitable that suppliers will have to share the burden and there will inevitably be some weaker suppliers that are a victim of a shake-out. But it does feel like it’s moving the deckchairs stuff.”

Some suppliers have even gone so far as to praise Tesco. “The difference between Tesco and Asda is that Asda only wants to be the cheapest, whereas Tesco wants to make a profit. It’s tweaking a few knobs in the hope this will bring it closer to the zeitgeist.”

For Tesco, the move comes at a crucial time, with CEO Philip Clarke poised to unveil the company’s first-half results next week, amid widespread speculation of a slowdown in UK profits and further like-for-like sales declines. The price offensive is the biggest signal yet of his determination to get the UK core operation back firing on all cylinders.

But the consensus of opinion in the City is that he has stopped short of pressing the nuclear button. “Tesco has consistently distanced itself from the ‘mutually ­assured destruction’ that would ­result from rebasing industry ­margins,” says Nomura analyst Nick Coulter.

Much will depend, though, on the reaction of Tesco’s rivals to this week’s developments. Morrisons points to the forthcoming relaunch of its own-label range as its most obvious counter-punch, while many expect Sainsbury’s to roll out its Brand Match scheme, being ­trialled in Northern Ireland.

Waitrose says it will continue with its own Brand Price Match, despite revealing recently that profits had fallen as the cost of matching Tesco reached £19m a year, even before the Tesco Big Price Drop.

And of the smaller players, Budgens confirmed it will carry on with its Tesco Price Match initiative, launched in August. But it’s Asda that everyone will be looking out for. Tesco has ratcheted up the noise. How will Asda respond?

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