In an announcement on Wednesday, ‘big four’ supermarket Asda said it would scrap its price guarantee from 3 October, following a similar move by Tesco PLC (LON:TSCO) in July.
The move may be seen as evidence that the seemingly unending supermarket price war is finally slowing down, however, there is a sea change underway in the supermarket sector -- one that many may not be expecting.
High-water mark for supermarket expansion
Dr Clive Black, head of research at City broker Shore Capital, said the price guarantees offered by supermarkets, particularly Asda, “never really had much traction” and their removal was more an issue of cutting dead weight than a stark change in strategy.
Instead, Black said location is the “key driver” of customer footfall in supermarkets, taking precedence over price, adding that expansion in the grocery industry has reached a high-water mark and the dynamics of the sector will start to move toward consolidation rather than growth.
“These businesses are not opening new stores,” Black said, arguing that what the sector will see going forward is a compounding process where the market will grow faster than new capacity, which he said, “works for its participants”.
Sainsbury’s-Asda merger good for shareholders, but could hit CMA speedbumps
The competition also looks as if it is about to heat up as both Sainsbury PLC (LON:SBRY) and Asda are set to leapfrog Tesco to the top spot following a planned £12bn merger that is currently being investigated by the UK's Competition and Markets Authority (CMA).
Despite the massive potential impact of the merger on the sector, the market so far has responded at the very least in a relaxed manner, even in the share prices of direct competitors.
READ: Competition watchdog kicks off formal probe into merger of Walmart's Asda and Sainsbury's
Since Sainsbury’s confirmed the merger on 30 April, its share price has shot up around 19% to 320.9p at last close on 5 September.
Meanwhile, somewhat confusingly, shares in its competitors have also gone up, with Tesco shares up around 1.8% to 240p over the intervening months while Morrison’s have jumped 8% to around 262p.
Black said this is down to the fact that “duopolies tend to work in favour of shareholders, not customers”, and that the real point of issue will be what remedies are put forward by the CMA before the merger is approved.
One of these could be the closing of superstores by both Sainsbury’s and Asda, which may throw up challenges in areas such as Northern Ireland where the two have a large percentage of the market share but few obvious buyers for superstores if they are made to sell them.
“Closing stores isn’t an option,” Black said, adding that the impact of supply chain alterations on customers could also cause a headache if the CMA latches onto it.
Overall, it seems as if price wars will always be a feature of the hyper-competitive grocery market, but with the expansion drive almost running on empty, the sector looks as if it will be shifting towards consolidation, which when fuelled by vast amount of free cash generation could cause even more intense price wars as the battle over convenient locations runs out of steam.