Consuming Issuse: The phoney supermarket price war

Tesco and Asda are said to be locked in a festive price war, handing hard-up customers some festive cheer in the recession. Before cracking open the bubbly, it's worth remembering that Father Christmas visits only once a year and the last time he descended my chimney he wasn't wearing the liveried uniform of a supermarket chain.

The Guardian's story this month, "Asda and Tesco in £400m Christmas price war", is likely to turn out to be as phoney as other supposed trolley conflicts between the chains. Supermarkets are not the immoral beasts they are often made out to be, outperforming small traders on such issues as fish sourcing and plastic bags (admittedly in the face of a bag tax). But the idea that they engage in hard-fought "price wars" is as fanciful as the tooth fairy.

However, what shoppers gain in some areas they lose in others. These multi-billion pound firms do not sacrifice profit margins to attract shoppers. In the last five years, Tesco's UK operating profit margin has risen from 5.7 per cent to 6.7 per cent. Over the same period, Sainsbury's operating profit has risen from 2.07 per cent to 3.26 per cent, while pre-tax profit at Morrisons has leapt from 1.59 per cent to 4.51 per cent. (Asda does not divulge its figures.)

So how can supermarkets cut prices and still make more money than ever? When they announce cuts, the stores certainly make them, otherwise trading standards officers would come knocking.

What happens is much sneakier. Prices are reduced for a limited period, non-promotion lines are put up, and, cunningly, "bargains" are only let down from an inflated level. It's called "ballooning" and its within the law, provided the higher price has prevailed for 28 days. Even if it has not been charged in all the stores in a chain.

Take supermarket wine. Bottles are marked up unpromoted for a while, and then sold with great fanfare at "half price", typically falling from £7.99 to £3.99. Jean-Manuel Spriet, chief executive of French drinks giant Pernod Ricard UK, which makes Jacob's Creek, blew the whistle on this practice three years ago, complaining that such dodgy discounting was damaging the industry and cheating customers.

"They [other wine suppliers] make the wines designed for sale at £3.99, introduce them at a higher price, and then bring the price down," Mr Spriet complained. Consumers know they are getting misled – they get used to it."

Another tactic is exaggeration. This Easter, as shoppers were battered by the recession, Asda claimed it was cutting the price of 5,000 products.

A shopping-basket survey by The Grocer magazine found that while more than a fifth of Asda items had fallen in price, half of those items had been cut by... a penny. In July, my colleague James Thompson found that while claiming to be slashing prices, Tesco, Asda and Sainsbury's had raised many staple items by 22 to 32 per cent.

Admittedly, food-price inflation was strong then, but the reality exposed the spin. "This is a price skirmish. The last proper price war we had was in the early 1990s," Greg Lawless, a Blue Oar analyst, said. "It's not in Tesco and Asda's interests to launch a price war as it would suck profits out of the sector." Malcolm Walker, chief executive of Iceland, suggested retailers could only afford to drop 0.1 per cent of gross margin. Price cuts were "tactical". "It is all marketing and spin," he said.

The Office of Fair Trading has started an inquiry into pricing across a range of sectors, including food. It could take a while. In the meantime, it's best to check value, not the price.

Heroes and villains

Hero: Christopher Graham

In his own not so quiet way, the Information Commissioner is stepping up the pressure on individuals and businesses who abuse our privacy. To the fury of T-Mobile on Tuesday, he disclosed that a rogue employee, or employees, at the mobile network had flogged "millions" of personal records to rivals, who had been contacting customers to offer them "cheaper deals", a technique known as "slamming". Mr Graham is demanding ministers introduce jail terms for serious breaches of the Data Protection Act.

Villain: Moet & Chandon.

Not for the first time, the French champagne house has flunked a blind taste test by Which? Its £29 market leader came second last in the test of 15 bottles, well behind Sainsbury's £15 Blanc de Noirs Brut, which was described as "full, dry and fruity" and an affordable option for entertaining. "Experts didn't like Moet & Chandon's 'slightly medical' aroma and felt that it hadan 'aggressive acidity' and 'lacked flavour'," said Which? I'd still drink it.

m.hickman@independent.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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