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Tesco declares war on rivals with £500m price cutting offensive

Store chain boss promises up to 30% off more than 3,000 items from Monday

Tesco has announced the biggest shake-up of its pricing strategy in nearly 20 years as it looks to regain lost ground in the UK.

UK boss Richard Brasher said that the supermarket will put £500m into price cuts of up to 30% on more than 3,000 everyday foodstuffs such as milk and pasta as well as fresh fruit and vegetables. The biggest reductions will be on the chain’s own-brand products.

Brasher said the initiative was not a phoney price war but heralded a big change in the way it operated as a supermarket. “This is a repositioning of price at Tesco,” he said, adding customers “would punish us” if it proved to be cynical marketing.

Brasher spent the day briefing the group’s store managers on the “big price drop” initiative, which launches on Monday after six months of planning. He described it as the biggest investment he had seen in 25 years with the company, and said the big change in strategy was a response to the soaring living costs that are holding back consumer spending. “Families are having to cut back on the staples, not just the extras,” said Brasher.

The price campaign represents a sharp change of strategy for Tesco, which has relied on promotions and its Clubcard loyalty scheme to lure shoppers. But Brasher said shoppers now wanted to see value for money when they paid at the checkout rather than the delayed gratification of extra Clubcard points.

He suggested 80% of consumers fell into the “squeezed middle” bracket, which was why the rationale was to cut the price of essentials.

Tesco said suppliers were not bearing the brunt of the changes. Rivals said the decision to axe its two-year-old double Clubcard points promotion in a month’s time would enable it to claw back the lion’s share of the headline investment figure. “This is classic smoke and mirrors from Tesco, giving with one hand and taking with the other,” said a spokesman for Sainsbury’s. “Removing double Clubcard points will save Tesco £350m.”

Tesco said internal cost savings would help it to absorb the price cuts without hurting its profitability, but analysts said 1,000 of the products, including carrots, cheddar cheese and biscuits, were own-label – which could increase the pressure on branded goods manufacturers.

Supermarket promotions have soared, with an estimated 40% of products now on offer. Brasher said Tesco had canvassed 200,000 customers who were “weary” of having to shop around for the best deals and complained that prices changed too often. “The market has become cluttered and we are part of that clutter,” he said, adding it planned to use the initiative to “simplify the shopping trip”.

Tesco will reduce multibuys, particularly in fresh food, as customers complained that “buy one, get two or three free” deals resulted in wastage.

The initiative heralds a shift towards “everyday low price”, the strategy favoured by Wal-Mart-owned rival Asda, which relies on high sales volumes.

Speculation that Tesco intended aggressive price cuts has hit the share price of smaller rivals as many peg their products’ prices to the market leader. Internet grocer Ocado closed down 6% at a record low of 96p, almost half its debut price of 180p. Ocado matches Tesco’s prices on around 8,000 branded products and this week warned that its profits were being squeezed as it invested in customer service in the face of an assault on its M25 heartland by Waitrose’s new home delivery service.

The price offensive also has implications for Asda with its “price guarantee” to be 10% cheaper than rivals or refund the difference, while Sainsbury’s profit margins are roughly half that of Tesco.

Brasher became the UK business’s first dedicated chief executive in the boardroom shake-up set in train by Sir Terry Leahy’s retirement this year. He is under pressure to reinvigorate the UK business which has been losing market share to its smaller competitors for three years.

Panmure Gordon analyst Philip Dorgan said the “devil was in the detail” but added: “The £500m number is, for once, ‘real’ and not the usual PR hype. It is clear that this investment is underpinned by a desire to get on the front foot once again with its customers, after too many years of allowing others to act like market leaders. Too much emphasis has been placed on rewarding customers through the Clubcard, which is a great tool, but 30% of customers don’t use it and all customers like rewards at the tills.” Tesco shares closed down 2.1% at 356p. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds