UK Grocers Face Price War, Time to Buy the Dip?

Asda's "price war" has caused havoc among UK grocers, but given the prevailing economic situation and cautious consumer sentiment, it remains uncertain whether this is a temporary dip or the beginning of a new trend.

This is War… But for How Long?

UK supermarket stocks lost more than £4 billion in market capitalisation last week after the third-largest chain, Asda, launched a price war aimed at gaining market share. According to Kantar data, Asda holds 12.6% of the British retail market, behind Sainsbury (15.7%) and Tesco (28.3%). However, Asda’s share fell from 13.6% in the previous year, while its larger competitors gained ground. Allan Leighton, who recently returned as Executive Chairman, has vowed to reverse Asda's decade-long decline, though he warned that the turnaround could take up to five years. His initial strategy involves investment of "millions" of pounds to lower prices, a move that has left investors scrambling as they worry about a prolonged period of price cutting, which could undermine the bottom line of Asda's competitors.

It comes at a challenging time for the grocery industry, as the typically low-margin industry grapples with rising labour costs due to government reforms and cautious consumer spending amid high inflation. According to surveys, 43% of Britons have cut back on spending, and while consumer confidence has recently improved to a three-month high, it remains in negative territory at -19, well below the long-term average of -10. While consumers in the UK would welcome bargains that could boost Asda's short-term market share, lower prices are unlikely to encourage more spending, and any gains are likely to come at the expense of other grocery chains. Additionally, there is uncertainty about whether Asda can leverage higher footfall into improved profits if it has to normalise prices later.

Being Prepared

The declaration of a price war hurt all grocery retailers, with Marks & Spencer (M&S) falling 9%. However, M&S remains the best performer among major chains, as analysts believe its higher-end clientele has helped it avoid the inflation-induced slump, and its typical customers are less likely to switch for lower prices. Tesco, which has maintained its position partly through pricing strategies, suffered the most and may face greater challenges as it continues to fend off the encroachment of German budget retailers Aldi and Lidl.

Some analysts, such as RBC Capital, view the decline as a buying opportunity, arguing that it does not reflect the broader fundamentals of the sector. The company notes that rivals have invested hundreds of millions to right-side prices over the past few years, and Asda will likely need to make a similar effort. Consequently, a major price war seems unlikely. Asda has announced price cuts on as many as 1,500 products, a small fraction of its over 10,000 available items. As for which supermarket might offer the best "buy the dip" opportunity, RBC points to Sainsbury's, as it has the least geographic overlap with Asda, and M&S, which is less exposed to price competition.

Double Bottom Signals Reversal

M&S, in fact, shows a double bottom around the 320 GBX level following the likely completion of a flag pattern. With the downward-sloping trendline near 370 GBX acting as a dynamic resistance, a breakout higher could pave the way for a move towards 400 GBX and the recent peak of 415 GBX. Conversely, if the trendline rejects bulls, a channel or descending triangle may form instead, exposing M&S to declines towards 295 GBX, with potential extensions eyeing 245 GBX.

Source: SpreadEx / Marks and Spencer Group

Key Takeaways

Asda's price war has caused havoc in UK supermarket stocks, but analysts believe the impact may be short-lived as rivals have already invested in pricing adjustments. According to analysts, Sainsbury's and Marks and Spencer, which are less exposed to Asda's geographic footprint and price competition, present a buying opportunity. Ultimately, the success of Asda's strategy will depend on its ability to leverage increased footfall into improved profitability, if it needs to normalise prices in the future.