View From City Road: War of the supermarkets goes on

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The Independent Online
The price war is over, David Sainsbury told the City yesterday. He was confident that the situation had been stabilised and that gross margins would be held from now on.

In other words, prices will not be cut any further. The message to competitors is rather different - the war continues.

Any price cuts from rivals will be met with a 'vigorous response'. In other words, prices will be cut by as much as it takes.

If that sounds remarkably similar to the noises emanating from Sainsbury's rivals Tesco and Safeway, that is because all three have a huge vested interest in ending the price war. In essence what they are saying to one another is: 'We won't cut our prices if you don't cut yours.'

If such utterances were made behind closed doors it would be called a cartel and its members could find themselves behind bars.

All three supermarket groups hope that by threatening retaliation loudly enough they will achieve the same thing but through legal means. Shoppers, however, may have rather different ideas.

On the face of it, Sainsbury's Essentials campaign has done the trick of getting customers back into its stores. Sales of the 300 products whose prices were reduced have risen by a fifth since the campaign started.

It may be true, as Mr Sainsbury contends, that last year's price war was sparked by Asda and Gateway repositioning themselves in the market, but there is no sign that rivals are prepared to give up and play dead.

Kwik Save is cutting prices sharply and will today ram home its low price message with advertisements showing its own brands are 39 per cent cheaper than Sainsbury.

Gateway is poised to launch a price promotion on fresh foods and Lidl, the German discounter, is shortly to open its first British stores.

True, Tesco and Safeway are more of a threat to Sainsbury than the discounters, but if their battle for market share is pursued through another lunge downwards in price the big three will have to follow.

The City clearly wants to believe Mr Sainsbury and has marked the shares up by more than 15 per cent, relative to the market, since their February nadir. But until it is clear that the war is over investors should restrict their buying to the stores.