Supermarket price deals: how low can they go?

The past few weekends will have seen bargain hunters across the UK scouring supermarket shelves.

Prices are plummeting on thousands of lines, with Morrisons and Asda catching the eye by offering bestselling, everyday goods at 50p – albeit for limited periods. If, as experts believe, we are hotting up for a price war, then these salvos have raised the temperature considerably.

It was Asda that sent the first shot. Its first 50p promotion on the weekend of 28/29 June – announced, cleverly, on 27 June to coincide with the eve of the Tesco agm – put the likes of bananas, potatoes, eggs, butter, coleslaw on a 50p special. 

Keen to avoid being labelled as a copycat, Tesco’s scrambled response was more generic. 

But Morrisons was not so proud, also selling items for 50p, although the items have been on a week-long promotion, and were selected as part of a bundled deal: a bbq for £4 the first week, and this time claiming it can provide a fresh family picnic or a week’s worth of school packed lunches for the same £4.

With Sainsbury’s offering to feed a family for a fiver, as well as putting more than 90 fresh fruit and vegetable products at half price over the past two weeks, a spokesperson said: “Our current promotional activity is just part of the cut and thrust of food retailing in the UK.”

But retail and pricing analysts are warning that the current model of promotions is not sustainable. Doubts persist as to whether the supermarkets – and Morrisons in particular – can afford to sustain such activity. 

A buyer at a rival supermarket says the 50p promotions “must be killing Morrisons because of the amount it is losing on each product”. 

The buyer points to a recent offer of four quarter pounders for 50p, which equates to Morrisons selling beef at £1.10 per kilo; the current market price of beef at the abattoir is £2.74 per kilo. 

And Aidan Bocci, chief executive of Commercial Advantage Consulting, refutes suggestions that what we’re seeing is normal. 

“This is going to hurt the multiples,” he says. “I’m sure all the supermarkets are rushing to find costs they can take out of their businesses in order to lay on these promotions.

“This is the start of a genuine price war. Retailers are facing the prospect of spending on everyday items dropping. These are not your regular promotions, the amount and scale of promotional activity reflects what a tense time it is for all involved.”

Regardless of whether the supermarkets can afford to maintain such offers, the high level of price promotion has had a notable effect on market share.

TNS data for the 12 weeks to 13 July indicates that, among the big four, Asda and Morrisons enjoyed 9% growth, ahead of the market and yielding higher shares than last year. Tesco’s growth of 7% and Sainsbury’s of 6% were still creditable, but slightly behind the overall market.

But it’s the discounters that are stealing the show, with Aldi sales up 19.5% and Lidl’s sales growing 14.3%. And arguably it was Aldi that kickstarted the single cost price promotion craze with an ongoing offer on six new products every month. Earlier in the year the price point was 39p. At the moment the price point is 69p. 

And, thanks to its lower cost base, it doesn’t affect the bottom line, says UK MD of buying Tony Baines. “We have a low cost base and lower profit margins, meaning our strategy of low pricing throughout the year is sustainable. The multiples are trying to offer low prices, but with a much higher cost base attached to their businesses.”

So what is Tesco doing to respond? Although it hasn’t opted for any fixed price point deals, it claims to have dropped prices on thousands of lines, while its marketing is markedly more aggressive, running national ads featuring the headline ‘Why Pay More At Asda?’. 

Asda is clearly not finished in this battle, however, and all eyes will be on it. While claiming the deals have been a success, it has hinted that the next wave of promotions will be of a different nature, including a list of items available this weekend for a pound. What does it have planned next?

“Watch this space,” an Asda spokesperson promises. “The 50p idea was a new and brilliant kind of promotion and now you’ll probably see a fresh way to demonstrate value to the customer.” We probably aren’t going to see items selling for 40p anytime soon, then.