Wal-Mart set to squeeze UK supermarket prices

The US giant taking over Asda will force the other food stores to sharpen up. By Hilary Clarke

h the mighty power of America! By snatching supermarket chain Asda from under the nose of Kingfisher, the US shopping phenomenon Wal- Mart, the biggest retailer in the world, last week achieved what the Office of Fair Trading has been trying to do for more than a year. The friendly takeover will instantly force British supermarkets to bring down their prices, which are currently among the highest in Europe.

Current estimates put the likely fall in the British shopper's weekly supermarket bill at around five per cent.

Wal-Mart certainly has deep enough pockets to maintain a price war until it achieves its stated aim of beating both Tesco and Sainsbury to the number one slot in the UK. Wal-Mart's global sales in 1998 of $137bn equated to one tenth of Britain's entire economic output in the same year.

The pressure on prices will reduce the need for legislation, believes Steve Woolf, retail analyst with Paribas.

"Politically, supermarkets have been a very easy target over the last 18 months," he says.

"Wal-Mart will hopefully take the heat off if they introduce a price war. The customer will be better off, and it takes pressure off of the Government to make legislation that would be unpopular in the sector."

Even so, the arrival of Wal-Mart signifies the realisation of the worst fears of the likes of Sainsbury, Tesco and Safeway, which will have to sharpen up their act to survive the pressure on their operating margins. They will have to make sure they find a different niche, like emphasising the quality of their products, say analysts. But that's not so easy with food.

"A can of beans is a can of beans, even if it has a different wrapper. It's not like ties, which can be priced from pounds 10 to pounds 120," says Mr Woolf.

However, the impending price battle is unlikely to centre on food and drink. Asda has already promised to maintain its "Backing Britain" policy, introduced at the end of last year, and by which it will spend at least pounds 400m buying British produce over the next three years.

Moreover, Wal-Mart's stated aim in expanding abroad has been to increase its global market share of non-food businesses.

Asda will henceforth be able to offer Wal-Mart's rock-bottom prices in essential non-food items like toiletries and pharmaceuticals. Wal-Mart can cut cheap deals with suppliers because of its sheer size.

For example, 20 per cent of Procter & Gamble's Pampers nappies globally are sold through Wal-Mart stores, and Wal-Mart accounts for around 15 per cent of Procter & Gamble's global sales and about the same amount of Unilever's.

To give an idea of how important big retailers relationships are with multinational companies, Tesco currently accounts for 20 per cent of Unilever's sales in the UK. Wal-Mart's arrival will be bad news for the main UK multiples, but also for companies like Boots and Kingfisher, which owns Superdrug and Woolworths.

But the shares that fell the most following the announcement that Wal- Mart was to buy Asda was the discount clothing company Matalan. On Friday, Matalan tried to put a brave face on things by issuing a statement welcoming the arrival of Wal-Mart in Britain, saying: "It will encourage growth in the value sector as a whole."

British retailers aren't the only ones under threat from Wal-Mart. Europe's retailing elite is also nervously watching events in the UK.

"Wal-Mart can use UK as a further stepping stone into Europe," says another City analyst. The fear is, once established here, Wal-Mart can start to shop around for another retailer to buy in mainland Europe. Indeed, Wal-Mart has already helped provide the catalyst for the ongoing consolidation of Europe's big retailers.

Since the American giant first entered the European market in December 1997 with the acquisition of Wertkauf - the 21-strong hypermarket chain in southern Germany - it has also snapped up 74 stores from Spar Handels.

Its rapid expansion has sparked a vicious price war in Germany, pushing down food prices there. Wal-Mart's growth rate - opening the same trading space per year as Tesco, Safeway and Sainsbury put together - is an awesome one for its European rivals, as much as it is for its British ones.

But the market Wal-Mart cherishes most now that it has gained a secure foothold in the UK - France - will probably be tougher to crack. The French are likely to resist any friendly takeover of one of their retail chains such as Promodes, tooth and nail, says Riet Vijgen, a retail analyst with the Belgian stockbrokers Puilaetco.

"The competition in Europe is not going to allow Wal-Mart to walk all over them," says Clive Black, an analyst at CCF Charterhouse in London.

Just as a possible outcome of last week's news here could be what Mr Woolf described as a "mercy merger" between two of the big UK supermarkets, more consolidation is likely in Europe as a result of Wal-Mart's arrival.

Whatever the outcome, Wal-Mart seems certain to put off any potential predators from Europe homing in on the UK market.

While hitherto high profit margins in Britain made the UK an attractive prospect for many European retailers like Holland's Ahold, "A lot of groups will be questioning whether they have to be in the UK with Wal-Mart here. They will ask themselves: `Is it worth fighting someone like Wal-Mart on UK soil?'" says Mr Woolf.

News
people And here is why...
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
Voices
voicesBy the man who has
Sport
Arsene Wenger tried to sign Eden Hazard
footballAfter 18 years with Arsenal, here are 18 things he has still never done as the Gunners' manager
PROMOTED VIDEO
Life and Style
The new Windows 10 Start Menu
tech
Arts and Entertainment
Kristen Stewart and Robert Pattinson star in The Twilight Saga but will not be starring in the new Facebook mini-movies
tvKristen Stewart and Stephenie Meyer will choose female directrs
Arts and Entertainment
Hilary North's 'How My Life Has Changed', 2001
books(and not a Buzzfeed article in sight)
News
ebooksAn unforgettable anthology of contemporary reportage
News
William Hague
people... when he called Hague the county's greatest
News
More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete today
Arts and Entertainment
There has been a boom in ticket sales for female comics, according to an industry survey
comedyFirst national survey reveals Britain’s comedic tastes
Arts and Entertainment
Twerking girls: Miley Cyrus's video for 'Wrecking Ball'
arts + ents
Arts and Entertainment
Ed Sheeran performs at his Amazon Front Row event on Tuesday 30 September
musicHe spotted PM at private gig
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?
Why do we like making lists?

Notes to self: Why do we like making lists?

Well it was good enough for Ancient Egyptians and Picasso...
Hong Kong protests: A good time to open a new restaurant?

A good time to open a new restaurant in Hong Kong?

As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

Paris Fashion Week

Lagerfeld leads a feminist riot on 'Boulevard Chanel'
Bruce Chatwin's Wales: One of the finest one-day walks in Britain

Simon Calder discovers Bruce Chatwin's Wales

One of the finest one-day walks you could hope for - in Britain
10 best children's nightwear

10 best children's nightwear

Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

Manchester City vs Roma

Five things we learnt from City’s Champions League draw at the Etihad
Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

Trouble on the Tyne

Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?