Sainsbury’s under fire as the price war with discounters soldiers on

What’s good for customers is bad for shareholders, with the grocer’s dividend the latest casualty in the battle on the high street

Bagging a bargain? Sainsbury’s Basics range competes with the discounters’ prices (Getty Images)

Sainsbury’s enigmatic former boss Justin King once described the supermarket price war as a mere “skirmish” when the Big Four supermarkets and discount rivals Aldi and Lidl were fighting it out.

But just 18 months after the supermarket cheerleader dismissed the threat of squeezed margins, the price war is continuing apace and shows no signs of easing up.

So just when will it end? How much has it cost? And what can shoppers and investors expect from one of the toughest battles to hit the high street?

Sainsbury’s current boss, Mike Coupe, suggested the falling prices will continue for at least another year and possibly longer, predicting that any return to normality was a long way off.

“The discounters still represent a significant threat to mainstream supermarkets in particular,” he explained.

“We’ve invested a lot of money relative to the discounters. The price gap has closed in the past year and that’s as a result of us investing a lot of money in base staples – bread, milk, fruit and vegetables, fish and poultry. We also recognise there’s still work to be done and the next period of time we will be thoughtfully investing in individual products, individual categories, to close that gap where appropriate.”

But despite all the price cuts, Mr Coupe doubts Sainsbury’s can ever reach the low costs of Aldi and Lidl. In the last year alone, Sainsbury’s has invested £150m in prices, which is great news for customers but bad news for shareholders, who saw the dividend cut on Wednesday.

The price war started at the height of the recession when shoppers suddenly found themselves with less money in their pockets and food budgets had to be spread further.

Aldi and Lidl saw a chance to win over the public and what was once seen as a dirty little secret suddenly burst into the mainstream, with shoppers wowed by lower prices and seemingly ripped-off versions of big name brands.

The Big Four supermarkets – Tesco, Sainsbury’s, Asda and Morrisons – had also been found wanting, pushing for fancier stores, misty vegetables and dismissing the threat as just another Kwik Save moment (a former discounter which came and went during the 1990s).

But the changes were permanent, and middle-class shoppers were keen to show off how much they had saved at Aldi and Lidl, with the Big Four suffering.

It led to Dalton Philips getting the sack at Morrisons, Phil Clarke overseeing a crumbling Tesco empire that led to an accounting scandal and Asda continuing to suffer some of the biggest falls in sales of recent years.

According to Kantar Worldpanel, grocery deflation has hit the sector for the last 12 months consecutively – down 1.7 per cent in the 12 weeks to 11 October – meaning £1.5bn has been taken out of the market last year.

The fall is mainly down to Asda, Tesco, Sainsbury’s and Morrisons all slashing prices and spending billions in the process, to try to compete with Aldi and Lidl, which now service nearly half of all families, in the last three months.

Individual product price wars meant milk, butter and egg prices hit new lows, and all four published incomprehensible lists of products that had fallen in price. Tesco launched a price drop, Asda promised price investments, Morrisons offered a price comparison web service and Sainsbury’s slashed prices on hundreds of lines.

Falling commodity prices have also played a major part, with rampant inflation during 2011 pushing prices to sky-high levels, as crops such as wheat struggled and global demand rose, only to fall back dramatically in subsequent years.

But with the economy recovering and consumers having more money in their pockets, a new kind of price war is being played out – the battle for the middle-class shopper.

Aldi and Lidl have already launched their attacks, with slick adverts and something akin to a Waitrose feel. Pushing low prices with quality products is a new area for the Big Four to tackle, with Sainsbury’s only response being to say its quality is better than the discounters.

John Rogers, Sainsbury’s finance chief, said: “We can compete with the discounters on price. You can buy some products in our stores in our Basics range that is as cheap as you can in the discounters. So, we are competing on price on those lines, but clearly if there’s better quality on offer, which we believe we have, then there’s a premium attached to that and we can compete in both dimensions.”

The other problem is that even though we all supposedly have an average of £1,000 a year more disposable income, we are not spending it in supermarkets, but snapping up those big-ticket items such as cars and kitchens that we did not buy during the recession. We are also eating out more, going to the cinema and ordering takeaways more – all to the benefit of listed companies such as The Restaurant Group, Domino’s Pizza and Cineworld.

Alas, the supermarkets continue to struggle along, and while shoppers might be loving the lower prices, it’s the shareholders who are feeling the pinch as short sellers make the sector one of the most heavily shorted.

Dividends were cut at Sainsbury’s on Wednesday, Tesco does not have one any more as it recovers from its accounting scandal, and Morrisons’ payout looks shaky.

And if you thought there would be rays of sunshine, consider this: Sainsbury’s share price after it revealed profits fell 18 per cent, which was better than expected, closed down 7 per cent – the biggest one-day fall since the 2008 recession that fired the starting gun on this price war. And there is no end in sight.