By Marcus Leach

Tesco’s launch of the ‘Big Price Drop’ marks a significant strategic shift for the retailer, according to independent retail analysts, Verdict Research.

The move to reduce promotions and cut back on multi-buys in favour of a clearer low price proposition brings Tesco closer to an EDLP (Everyday Low Prices) stance.

The investment of £500m announced yesterday (Thursday) by Richard Brasher, will bring down the prices of 3,000 everyday products, including 1,000 own brand items.

“As highlighted in our UK Food & Grocery Retailers 2011 report, the culture of promotions which is embedded in the grocery sector, is unsustainable,” explains Cliona Lynch, Retail Analyst at Verdict. “Deeper and wider promotions have reached a peak level across the Big Four. Moreover, the ubiquitous nature of promotions is blurring the value message for consumers.

“With consumer spending power low and price inflation still high (Verdict forecasts inflation at 3.1% in 2011) shoppers are increasingly looking for a strong value message from their retailer. Tesco is sending a clear signal to both customers and competitors that it can provide that value with a simplified strategy."

Indeed Tesco’s move to simplify its promotions and compete more heavily on price is also a response to more intense competition. With growth in the £128bn food & grocery sector being driven by inflation rather than volumes supermarkets are fighting for share Moreover, grocers are rapidly increasing space, which we forecast to increase 22 million sq ft between 2010 and 2015, almost twice that of the new space opened between 2005 and 2010.

“As the largest player in the food & grocery market, with a share, we estimate of 28.3% in 2011 (excluding fuel), growing sales will be far more difficult for Tesco as competitors encroach on to its territory,” continues Cliona. “Due to its size and maturity it needs to look beyond space to increase topline sales. This investment in price is a smart move and should reap rewards in retaining customers and winning share from rivals, for the time being.”

Cliona also says that the most obvious competitor to be hit, Asda, has already dismissed the initiative publicly, stating that it will remain 10% cheaper. Sainsbury’s will find solace in its recently launched ‘Live Well for Less’ rebranding, which highlights the value proposition of the retailer without such a clear cut price focus. Waitrose and Ocado’s price matching strategies will be impacted as the investment made by Tesco may be unsustainable for these retailers. Morrison’s, though it will be impacted initially, has plenty of gains still available in opening new space and focusing on fresh.

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