Who'll win the price war?

By Gillian Lacey-Solymar Consumer Affairs Correspondent

Tesco and Asda have both announced big price-cutting campaigns.

Tesco says it's slashing £80m from the price of more than 1,000 products.

Asda is trimming prices in its George clothing range.

The "Supermarket Wars" headlines are being trundled out yet again.

But do these measures really mean the giants are squaring up to each other?

And, more importantly, what's in it for us?

Sceptical

It's reasonable to be a little sceptical when supermarkets make these announcements - after all, we get at least one every year.

However, they normally come in February, when we've finished with Christmas and the January sales and can start getting back into our spending routine.

£80m isn't that much in the context of a business the size of Tesco

Richard Perks, Mintel analyst

One of the reasons the cuts have been made now is that supermarkets are relying more and more on lines such as clothing.

So to stay competitive, they have to bring down prices when other stores are having their sales.

But Safeway is pouring cold water on these latest price cuts.

Director Kevin Hawkins said: "Typically in the two or three months leading up to one of these initiatives, prices are increased."

He would say that, wouldn't he - Safeway isn't doing brilliantly at the moment, trailing behind the other big names in terms of performance.

But he's not alone in being sceptical.

Richard Perks: "Normal marketing expenditure"

"We have just come through the whole Christmas period when the pricing structure will be different anyway," says retail analyst Richard Perks.

"But £80m isn't that much in the context of a business the size of Tesco and I think what we're seeing is more a question of intelligent use of normal marketing expenditure."

Do these big cost-cutting campaigns actually get more shoppers through the doors?

Interestingly, for most people convenience is the biggest factor when deciding which supermarket to visit.

And once you're inside the store, prices aren't that different.

Comparison

The Grocer magazine regularly compares the cost of an average basket of goods.

At Asda - which sells itself largely on low prices - the basket costs £35.90.

But at the other three big supermarkets, there's barely any difference:

Tesco - £37.09

Sainsbury - £37.14

Safeway - £37.58.

There are two very different potential explanations for these similarities.

Retailers must constantly be looking over their shoulders to ensure that their prices are kept in line with their rivals.

On the other hand, cynics might take the opposite view, suggesting there's not much difference precisely because there's little genuine competition.

I think competition in this sector does work to the benefit of the consumer, and we're sophisticated enough to realise that.

We know that whichever of the big names we shop at, the prices are going to be broadly the same.

So who wins and who loses when price tickets get slashed?

Customers - If Tesco is making cuts worth £80m, that's money that comes off our bill at the checkout. In fact, during the 1990s the actual cost of our weekly shop fell by more than 9%, so we're doing pretty well.

Shareholders - They won't be so happy. There's something called operating leverage, which is how sensitive a business is to price and volume. Retailers are very sensitive, and when prices go down a little, profits go down a lot. That means less for shareholders.

Suppliers - Supermarkets might like to take credit for price cuts, but they don't carry the entire cost. Some suppliers will be badly hit by this latest round - in some cases, Tesco's suppliers are bearing the whole cut.

So whether it's a price war or not, the end result is usually good for customers.

But don't forget - price is just one of the marketing and psychological weapons supermarkets use to make us part with more money.