Asda price cuts spark fears of retailer wars

Retailer Asda is slashing the price of one in five of its products by an average of 13%, in a move that suppliers fear could spark another supermarket price war.

The new promotion will run for a minimum of six to 12 weeks on 3600 products including potatoes, milk, bread, cheese and yoghurt. In what the retailer calls its largest roll-back in a decade, it will reduce the price of a four-pint bottle of milk by almost 20%, to £1.23.

That is equivalent to 54.11p/litre and is the first straight cut in the retail price of own-label milk since July 2007, according to a DairyCo Datum report. The UK’s second biggest supermarket chain has also cut own label cheddar cheese prices by almost one-third.

“Industry experts have suggested that the price cuts are aimed at reducing the impact of food price inflation on consumer spending, and will more than offset the increase in VAT, which returned to 17.5% on 1 January,” said a DairyCo spokesman. Food prices increased by 3.7% in December, against a rise of 2.8% in November, and retailers have said weak customer demand is their biggest concern for 2010.

“Asda may be using the price cuts as a strategy to grow its customer base. However, some commentators suggest that by cutting the price of staple goods, other supermarkets could react in a tit-for-tat price war.” Tesco has already launched a special offer promotion on 12,000 of its goods, with Sainsbury’s saying it has reduced the price of more than 3,600 products.

Farmgate milk prices have declined steadily throughout 2009, while retail prices have remained stable at £1.53 for four pints, the spokesman said. “This suggests that supermarket margins have been increasing at the cost of producers and possibly processors. Following Asda’s announcement, it is also likely that other supermarkets may follow suit, which could put more pressure on prices in the supply chain. This comes at a time when prices should be rising following the recovery in the commodity markets.”