Tesco results reveal end of price war era

Tuesday, 12 January 2010

Tesco's buoyant results - having beaten analysts' expectations - will give succour to the UK's beleaguered retail sector, and further credence to the notion that the UK economy is finally heaving itself out of recession.

Its UK sales figures are particularly heartening. A strong domestic performance will help Tesco fund its expansion plans overseas, which is surely where its future growth potential lies.

Tesco's positive figures top off a strong round of New Year's trading updates from British supermarkets following the crucial festive period. Last week, Sainsbury's reported an increase in like-for-like sales, excluding fuel, of 3.7%, while Morrisons is expected to report similarly strong results over the coming weeks, having enjoyed a bumper Christmas.

What is remarkable about the trading figures we have seen across the supermarket sector is their sheer strength in a still fragile economic recovery. In addition to the severe constraints one would expect on consumers' purse-strings in the current environment, the sector has also had to contend with a sustained battered pound.

When the pound first began its prolonged slide, there were real fears in the market that this would put significant pressure on supermarkets' margins given our increased dependence on food imports.

In the event, however, shareholders will be relieved that supermarkets have navigated the economic backdrop well, with a gradual détente in the intensely competitive price wars that characterised the sector in the boom.

As the good times gave way to more trying conditions, enthusiasm for pre-emptive discounting appears to have waned, replaced by a more reactive approach to price cutting. In short, the price wars of yore have become markedly less frequent and more limited in scope. The levels of undercutting witnessed previously were symptoms of a race to the bottom in terms of cutting excess fat, but now there is simply no excess fat to spare.

This has given our major supermarkets the breathing space required to edge up prices to cope with the economic malaise. No doubt they have been helped by other factors too, including consumer fatigue with the recession, and the growth of non-food sales in the face of rivals such as Woolworths exiting the High Street.

While the grocery sector will always be competitive, the zeal for undercutting has been replaced by more tactical discounts, going some way to explain why Christmas figures have been so positive across the board."

Paul Mumford, senior fund manager, Cavendish Asset Management

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