Grocery price war has long way to run

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Supermarket margins will continue to come under pressure and the price war among the big grocery chains has some way to go, according to a report published today by the retail consultants Verdict Research.

Oversupply in a static market is cited as the main reason for margin pressure as the larger superstores and the discounters battle for market share. Verdict predicts that the price war, currently restricted only to limited lines in supermarkets, will spread to added-value and fresh food products as well as non-food items. Discounting will also spread from own brands, such as Tesco's Value lines, to manufacturers' brands as price premiums become increasingly difficult to maintain.

"Over the last two years the public has come to expect a better deal on price but with no concession on quality," Verdict's Richard Hyman said. He added that overcapacity has made the price battle inevitable.

Between 1990 and 1994 consumer spending in real terms on food grew by just 2.7 per cent while floor space increased by 8.5 per cent. Verdict argues that in spite of stricter planning controls and slower store opening programmes, floor-space growth acrossthe sector will see an additional one million square feet of space added annually over the next few years. This will mean that supermarket groups will have to fight among themselves for market share.

Sainsbury and Tesco declined to comment on potential margin erosion. Sainsbury is due to issue a trading statement at the end of the month.

The influx of powerful discount chains from Continental Europe continues to present problems for the UK grocery market. Chains such as Aldi from Germany and Netto from Denmark operate on gross margins of around 2 per cent compared to the 7 or 8 per cent of UK supermarket groups.

The discounters will also force Kwik Save to defend its position as Britain's largest discount group. During 1993-94 Kwik Save saw like-for-like sales fall by 2.7 per cent in the second half and by 5 per cent in the first eight weeks of 1993-94.