UK supermarkets: the battle and the war

Anyone with a queasy stomach, look away now. The battlefield of the 2014 UK supermarket price war was not a pretty sight. J Sainsbury has been wounded - on Wednesday it reported a 15 per cent fall in underlying profits for the year to March. Tesco, down by more than two-thirds, and Wm Morrison, where profits halved, came off worse. The opponents are the all conquering discounters, Aldi and Lidl, where sales are growing in double digits. And they have plenty of room to maraud some more. According to Euromonitor, the discounters had a 6 per cent market share in the UK last year. In Germany the figure is 34 per cent.

But look closely and the battle might be starting to take its toll on the discounters. Data from Kantar Worldpanel, a researcher, shows that the rate of growth in their market share has almost halved over the past year. Simultaneously, the rate of decline from the big four (Tesco, Sainsbury, Wm Morrison and Asda) has been easing. The discounters are still winning the war but less convincingly than they were.

There are several explanations. First, they may be hitting capacity constraints. Research from UBS suggests that although they are opening new space at 10 per cent a year, they may be struggling to squeeze much more from their existing space. And even their ability to open new stores is constrained by the need to keep the format simple. Second, the big four have responded to the threat with their own price cuts. Sainsbury, for example, has just increased its "investment" in lower prices from £150m to £200m. Finally, the UK's economic recovery may be working against the discounters. The Centre for Economic and Business Research (working on behalf of Asda) says that weekly discretionary income for UK households was 10 per cent (or £16) higher in March than it was a year earlier. That may be enough for some people to splash out a little more on the groceries.

It is far too early to write the discounters off, or even to assume that they are a recessionary phenomenon. Their recent efforts to compete on quality as well as price will help them to retain customers who have a little more cash in their pockets. And the big four will eventually tire of cutting prices. So the war continues, but expect this year's battle to be a little more evenly matched.

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