LONDON (MarketWatch) -- Tesco PLC (TSCO.LN) Thursday announced a GBP500 million U.K. price cutting initiative that could spark a price war across the U.K. supermarkets, and is paying for the investment by scaling back its loyalty scheme rewards.
The company said in a statement that it will cut prices on thousands of essential items from Monday, with most of the financial investment going into reducing the price of Tesco's own-branded goods, while also simplifying and scaling back on promotions and ending its double Clubcard points promotion for its loyalty scheme that has been running for the past two years.
Analysts believe the move is likely to prompt competing grocers to launch their own initiatives, and will also force those supermarkets that currently match prices on Tesco products to reduce their prices in line with Tesco's reductions.
Still, investors view the cut-throat U.K. grocery market as relatively 'rational', with little probability of a meaningful price war that could erode margins and hit profits.
But the difficult consumer environment has forced all retailers to compete more vigorously with a raft of promotions such as price-match promises, new marketing tag-lines focusing on value, and offers of cash returns if customers can shop cheaper elsewhere.
Tesco has lagged behind its U.K. supermarket rivals such as J Sainsbury PLC (SBRY.LN), Wm Morrison Supermarkets PLC (MRW.LN) and Wal-Mart Stores Inc.-owned
WMT,
U.K. Chief Executive Richard Brasher said Thursday, "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. "
At 1415 GMT, Tesco shares were down 2.94% or 11 pence at 353 pence in a sharply lower market.
--Tesco to invest GBP500 million in price cuts
--To fund price cuts by scaling back loyalty card scheme rewards and planned efficiency savings
--Move could prompt other supermarkets to launch own initiatives
--Analysts don't expect a price war
(Adds CEO comment in second and tenth paragraph, analyst comment in paragraphs five and 12, rival company comment in paragraph six and background in paragraph 11)
LONDON (MarketWatch) -- Tesco PLC (TSCO.LN) Thursday said it will invest GBP500 million ($775.0 million) in price cuts in a move that could spark a price war among U.K. supermarkets.
The company said it will cut prices on thousands of essential items from Monday, with most of the financial investment going into reducing the price of Tesco's own-branded goods. It will also simplify and scale back promotions and end its double Clubcard points promotion for its loyalty scheme, which has been running for the past two years, to fund the move, which U.K. Chief Executive Richard Brasher insisted would not affect margins.
Analysts believe the move will prompt competing grocers to launch their own initiatives, and force those supermarkets that match prices on Tesco products to reduce their prices in line with Tesco's.
Still, a severe price war is unlikely as investors and analysts think the cut-throat U.K grocery market is relatively rational.
Shore Capital analyst Clive Black said Tesco's price initiative is "measured, planned and rational," although it will still put pressure on Tesco's supermarket competitors, whether through margin investment or lost revenue.
Wal-Mart Stores Inc. WMT-owned Asda Supermarkets said Thursday it will continue to guarantee that its shopping basket is 10% cheaper than its rivals. Wm Morrisons Supermarkets PLC (MRW.LN) declined to comment on Tesco's move, while J Sainsbury PLC (SBRY.LN) and Ocado Group PLC (OCDO.LN) were not immediately available for comment.
The difficult consumer environment in the U.K. has forced all retailers to compete more vigorously on price, with a raft of promotions such as price-match promises, new marketing tag-lines focusing on value and offers of cash returns if customers can shop cheaper elsewhere.
Tesco has lagged behind its U.K. rivals for several quarters, not least because it is the most heavily exposed to non-food sales. Sales of these goods have suffered as food and fuel-price inflation have crimped consumer spending on non-essential items.
"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," said Brasher.
He said there will be some price cuts on non-food items but the main thrust of the cost savings will be focused on everyday grocery essentials.
Coordinated price cuts are not new to the U.K. grocery market. Supermarkets traditionally invest in new year promotions, and in January Tesco pledged GBP340 million of price cuts, while Morrisons cut weekly shopping bills by GBP40 per week and Sainsbury announced savings of GBP300 million.
Panmure analyst Philip Dorgan believes Ocado will be the hardest hit by a Tesco price move, because it matches the prices on more than 7,000 of Tesco's products and doesn't have the same scale as the other larger supermarkets.
Tesco shares closed down 2.25% or 8 pence at 356 pence in a sharply lower market.
