View from City Road: Supermarkets hit from both sides

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The main supermarket retailers could be forgiven for feeling irritated by suggestions that the Office of Fair Trading should investigate whether they have colluded to keep prices high. Concern in the City about just the opposite problem - that cut-throat competition for shoppers' custom is undermining their profits - has sent shares in Sainsbury, Tesco and Argyll plunging by more than 20 per cent relative to the market since the new year.

The real beauty of the argument, however, is that both sides can use the same ammunition. Gross margins of 8 per cent-plus - far higher than in virtually any other country - and the concerted efforts of the big three to keep out the discount shopping clubs could both point to collusion. But, to the doomsters, these moves smack of panic in the face of crumbling sales and eroding margins.

The discounters are already skimming off some of the fat - and forcing the majors to respond. The latest Verdict food pricing survey showed that prices among discounters fell by an average of 6 per cent in the nine months to July; for the majors, however, the average fall was 11 per cent as they struggled to stop their customers defecting for their bargains.

That makes the City's belief that Tesco - whose share rating languishes at 40 per cent below the market - is uniquely vulnerable to the discounters look less credible. It may have been the first to crack, with the launch of the Tesco Value brand of low-price goods, but history is likely to show it was merely leading the pack downmarket.

For there is no doubt that the discounters are gaining ground - and not just in food retailing. That may be partly due to the fact that the stirrings of recovery have so far been largely export-led and have yet to make an impact on the confidence - or wallets - of the man in the street. But it also reflects a change in consumers. Value is becoming a priority.

That does not mean disaster is looming for food retailers, but it does mean they are going to have to work harder at keeping their newly price- conscious customers. And that is likely to mean less for shareholders.