Outlook: Tesco's price war is actually more like a skirmish

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The Independent Online

If in doubt launch a "price war". That has been the tactic in the supermarket sector for as long as anyone can remember. Yet most price wars are in name alone: mark-downs on prominent products are paid for by mark-ups in another aisle.

Is Tesco's latest initiative any different to what has gone before? Well, the reaction of investors in its rivals over the past couple of days suggests they fear the effects of the "Big Price Drop", especially at Ocado, the online grocer that has been running apromotion promising to match Tesco's prices of late.

The scale of the investment, at some £500m, is significant too, though less so in the context of the £67.5bn of turnover that the grocer recorded last year.

Still, Tesco is operating on exceptionally low margins – nor did it give any indication yesterday that it is scaling back key performancetargets in the light of this initiative. The Big Price Drop will therefore be a proportionate campaign, that is consistent with Tesco's long-held – and publicly-stated – view that genuine price wars are destructive for all concerned, including the supermarket that starts them (not that any of the grocers object to headlines that mention price wars).

There is method in this. It must be said that Tesco has had, by its own standards in any case, a difficult year in the UK, which, despite international expansion, is still responsible for two-thirds of turnover.

It has seen its market share slip on groceries, though it is still miles ahead of the competition, as it has been squeezed by competition from discount operators such as Aldi and Lidl – which is why it looks as if price cuts are to be concentrated on value ranges – as well as more upmarket operators.

It is also more vulnerable than its rivals to the economic environment, since its non-food sales, spending that is much more discretionary, so dwarf theirs. As a result, whenconsumers cut back, Tesco feels the pain more than any of its supermarket rivals.

Remember too, that back in June, Philip Clarke, the new chief executive of Tesco, gave a presentation on his first 100 days in office since taking over from Sir Terry Leahy. His first two slides made clear that hispriority would be to keep the core UK business "strong and growing," while the third slide explained how he planned to do that.

Consider Big Price Drop in that context. It is a swift response to the erosion the grocer has suffered over recent months. It is the sort of ruthless move one has come to expect from a business that is never complacent about its market leadership. And it will have an effect on Tesco's rivals. What it is not, however, is a price war.