Outlook: Smokescreen won't save supermarkets

ANOTHER DAY, another round of supermarket price cuts. This time it is Asda wading in with 1,000 discounted items in a move that will cost it an extra pounds 50m. Pampers nappies anyone? Come on down; the price is being cut from pounds 12.75 to pounds 9.99. Chicken Tonight curry sauce? Asda certainly knows its market - down from pounds 1.35 to a lip-tingling 99p. Marvellous.

Coming just days after Tesco attempted to grab the headlines with a similar round of cuts, and a couple of weeks after the price of bread sank to 7p a loaf in the so-called "bread wars", it is worth asking the question: are these the first shots in a full scale price war? Or are they just bits of tactical, PR posturing that just happen to have been launched a couple of weeks ahead of the expected publication of the OFT report on supermarket profiteering?

Life has undoubtedly got a little tougher for our supermarket behemoths. But a look at the official retail figures shows that compared to other sectors, food prices have held up very nicely for the grocers. While footwear and clothing prices were under constant deflationary pressure last year, food prices rose by 2 per cent. The rise added around 0.5 percentage points to the overall inflation increase of around 2.5 per cent.

Certain prices have shown remarkable rises. The price of potatoes in January was 29 per cent higher than the same month a year ago, for example, though supply issues are a major factor here. Tea, where supply is less obviously a problem, went up by 9 per cent, fish by 12 per cent and fresh vegetables by 7 per cent.

Retail prices of pork (one of the items reduced in price by Asda yesterday) fell by 11 per cent. But this was in a year when the wholesale price of pork plummeted because of oversupply in Europe and the evaporation of demand from Russia and the Far East. Was all that price fall passed on to customers before yesterday's little manoeuvre? You bet it wasn't.

When Asda reported its half year results in December its margins had fallen by just 0.2 per cent year on year. Not much pain there. One thousand sounds a big number, but more than a third of the cuts are confined to poor selling and narrow product ranges like fruit flavoured teas and sun lotion.

There's no getting away from it. As the OFT puts the finishing touches to its report, it is becoming very clear that the supermarket sector is one place where the major players can definitely afford to charge lower prices - and permanently. Government proposals to introduce regular shopping basket price comparisons, plus a kick from the OFT, will force them to do just that.

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