The Big Question: What do supermarkets' claimed price cuts really amount to?

(Independent Graphics)

Why are we asking this now?

Tesco, the UK's No.1 retailer, says it is launching a new budget range with extra-low prices, called Discount Brands, which will have 350 lines. Altogether £100m is being spent by Tesco on price cuts. Meanwhile Asda, the UK's No.2, is trimming the cost of all 5,000 items in its budget SmartPrice range, slashing the price of its cheapest oranges, cola, crisps and cornflakes. It has not divulged the cost.

Does this amount to a price war?

As the credit crunch bites, all the Big Four stores (Tesco, Asda, Sainsbury's and Morrisons) are claiming they will help shoppers hit by rising housing, energy and petrol costs.

Earlier this month the UK's third biggest grocer, Sainsbury's, launched a Switch and Save campaign claiming that its own-brand range was 20 per cent cheaper than branded products. Last week Morrisons announced it was cutting the price of 4,000 products.

So food prices are going down?

No, they are rising – by up to 14 per cent a year, when the Consumer Price Index is 4.4 per cent. Just how far food prices have gone up depends on where you shop. According to mysupermarket.co.uk, Tesco, Asda and Sainsbury have raised prices by 5.9 per cent in the past 12 months, while market researcher AC Nielsen says its 75,000 monitored products are up 9 per cent.

The Office of National Statistics says food inflation is 14.5 per cent, based on its basket of 134 commonly-bought foods. What is certain is that some prices have increased steeply, and many of those items are staples. Mysupermarket's basket of 24 items – bread, eggs, baked beans – is up 20 per cent in a year. The ONS is probably about right: food bills are up 15 per cent.

Why are prices rising?

The price of wheat – the major constituent in many foods and feed for chickens, pigs and cows – has soared, pushing up the cost of bread, pasta, cereals, meat, milk and eggs. The surging oil price has increased the cost of plastic in packaging and transport. Rising world populations and growing demand for more meat from large nations such as China, India and Brazil, which have increasingly prosperous populations, have exacerbated if not caused many of these factors.

So it's not a price war?

Not quite; a price skirmish would be a better description. Supermarkets are cutting prices of some goods, both to see off rivals and to give the appearance of being on the shopper's side. Asda really does sell a Smartprice loaf of white bread for 30p, and Morrison's a 400g pack of Birds Eye frozen peas for 60p. But many promotions are "cut and run" discounts designed to end after a certain time. And many suspect the reductions are being driven by a desire for cheap publicity and, more crucially, to combat the rise of the European "hard discounters", the best known of which are Aldi and Lidl, both German-owned with about 400 stores in the UK each.

Why are supermarkets afraid of Aldi and Lidl?

The no-frills budget chains are taking business away from British supermarkets. According to AC Nielsen, Tesco fell from 31.7 per cent to 31.5 per cent and Sainsbury's fell from 16 per cent to 15.8 per cent in the 12 weeks to 7 September, while low-cost Asda increased its share. Most dramatic were the gains by the hard discounters: sales at Aldi have shot up by 20 per cent and Lidl's by 11 per cent in the past year, while discount frozen food chain Farm Foods was up 26 per cent.

Are the 'hard' discounters any good?

Shopping at Lidl or Aldi, or for that matter the smaller Danish chain Netto, is very different from shopping at one of the Big Four. The hard discounters are low price and low service. Shoppers switching to them get a culture shock similar to that experienced by fliers who switched from national carriers to no-frills airlines. Instead of no ticket, no guaranteed seat, and no free snacks, though, shoppers are finding no or few well-known brands, no free shopping bags, and no quick service at the till. Many don't mind.

Despite scoring very poorly for customer service Lidl came equal sixth and Aldi ninth out of 77 retailers in a shopper survey in February. Waitrose came top, followed by John Lewis and independent book and electrical retailers. The message from shoppers could be summed up: "We like good service and reasonable prices – and we will tolerate poor service if prices are low. But we hate poor service if the prices are not cheap" (JD Sports, JJB Sports, Woolworths, Currys came last in the Which? survey).

How might all this change retailing?

The hard discounters are likely to increase their share for the foreseeable future, just like the no-frills airlines have done in the past decade. That is why supermarkets are trying to become more like them, launching their own budget ranges, just as British Airways launched Go and BMI launched BMI Baby in the 1990s.

So which is the cheapest supermarket?

Although prices at the Big Four change, Asda has won The Grocer magazine's title of cheapest supermarket for 11 years running. At the start of this month, The Grocer's check on 33 common products established this result: Asda (£48.78); Tesco (£50.73); Morrisons (£52.36); Sainsbury's £52.46); and Waitrose (£57.94.). Waitrose cost 18 per cent more than Asda. But Aldi and Lidl have been found to cheaper than all of them – about 20 per cent cheaper than Tesco.

So how can I save money?

Research by the Government's environmental body Wrap shows that shoppers waste around one third of food – equivalent to getting home and dumping one in three bags straight in the bin. It advises people to plan more meals and buy more frozen ingredients. Making meals from fresh ingredients is far cheaper than buying processed food.

Cutting out supermarkets altogether can deliver even better value, according to some studies. Author Kate Lock found that her £16 organic box was between 23 and 64 per cent cheaper than equivalent produce at Tesco and Sainsbury in her home city of York this summer. Only non-organic produce at market stalls was cheaper, by up to 10 per cent. A survey in 2006 by the New Economics Foundation found that food at Queens Market in east London was 53 per cent cheaper than the local Asda.

So are prices coming down?

Yes...

* Tesco, Asda, Sainsbury's and Morrisons say they're cutting the price of 9,000 products

* Supermarkets need to appeal to credit crunch shoppers who face surging bills

* The Big Four need to compete with the budget European shops Aldi and Lidl

No...

* Supermarkets can't be cutting prices if they are still rising – and they are

* Many of the promotions end after a few weeks or even a weekend

* Stores make their fattest profits from processed foods, not staples