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Tesco takes battle to rivals with £500m price cuts

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Leading UK supermarket Tesco is set to launch a major shake-up of its promotional offers, reducing the price of over 3,000 products from next Monday, it was announced today.

The move is expected to create a damaging price war across the grocery sector as the supermarket giant aims to increase its market share and profits during the ongoing economic downturn by launching what it calls The Big Price Drop.

Rumours of the move circulated in the City yesterday, sending market shares into a frenzy, as online grocer Ocado, Sainsbury’s and Morrisons all reported losses in share prices following the allegations.

Kantar Worldpanel data published last week revealed that Tesco’s market share had dropped to 30.4 per cent, down 0.1 per cent on last month and 0.4 per cent on the same period last year, and this latest development is considered a reaction by Tesco to a number of years of flat market share growth.

Tesco claims that the investment of more than £500 million is a response to evidence from the Institute for Fiscal Studies and the Office of Budget Responsibility (OBR) that family spending power will continue to fall in the months ahead.

With the OBR predicting that average earnings are set to decrease within the next two years as 80 per cent of the population experience a substantial squeeze on their income, The Big Price Drop’s main focus will be to reduce the cost of over 1,000 own-branded items.

Announcing the new initiative, CEO of Tesco UK Richard Basher said: “Across the country families are telling us the same thing – their budgets are under real pressure.

“They want more help today to afford everyday essentials.

“We have listened carefully and for families facing hard times and looking for genuine savings, The Big Price Drop will cut prices on the products they need to buy the most.”

This is not the first time this year that the grocer has been the first to lower prices on essential items. Last month, Tesco cut prices of fuel by 2p a litre, just days after announcing a 1p drop in the price of crude, causing a rush among competitors such as Asda and Sainsbury’s to lower their own prices accordingly.

Edward Garner, Communications Director at Kantar Worldpanel, told Retail Gazette that a sense of panic over the news from the press and competitors alike would be detrimental to the sector.

“The word price war occasionally produces a sigh of cynicism,” he warned.

“Having said that, Tesco is probably sitting around having seen its market share do little since 2006.

“Being so big is starting to act against them, as, for the second time running discounters such as Aldi and Lidl are doing well. In Tesco’s arsenal they have the club card which, in the run up to Christmas, gives more credence than it would otherwise have.

“Tesco’s being so big has caused huge competition and the group is trying to remove one of the reasons to go to a discounter.”

In a change to its Clubcard offer, the supermarket has announced that it will end its double Clubcard points in four weeks’ time, while increasing value by improving exchange rates on the most popular rewards from three times to four times the value.

Analysts Shore Capital stated that this development was implemented as the company seeks to fund a reduction in unit spend as households continue to face economic hardship.

Clive Black, retail analyst at the stockbroker, said: “The Big Price Drop has merit to our minds, albeit needs to be effectively executed.

“In particular, it is important that Tesco does not disenfranchise higher category shoppers through this work, as we believe took place with exclusive discount brands in 2009.

“In this respect, we will be interested to see where value and exclusive discount brands fit into the broader proposition too. Furthermore, this initiative is grocery based and not addressing issues in non-food faced by Tesco, which we deem management to also be focusing upon.”

Basher maintains that, while the reduction is focused solely on food at this stage, this is a response to customers’ needs as it seeks to decrease the cost of everyday items such as pasta, milk and bread.

“My message to our customers in these tough times is clear – we have listened and we are going to help. From Monday, you will be able to save money everyday at Tesco on the essentials you need the most.”

What impact today’s announcement has on Tesco’s suppliers, and the actions it prompts at its main grocery rivals, remains to be seen.

Published on Thursday 22 September by Editorial Assistant
Tags: Tesco Grocery

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