U.K. Grocers in Price Fight, and It's Drawing Customers

BRADFORD, England -- The global recession is spoiling the summer for a lot of industries, but not the U.K.'s supermarkets. They're loving it.  With an estimated five million Britons staying home this summer instead of traveling, the country's leading grocers are slugging it out for shoppers' time and money. They're slashing prices, launching new budget brands and taunting the price claims of rivals in advertising.

"Look at this full barbecue for £4," or about $6.50, says Marc Bolland, chief executive of Morrisons Supermarkets PLC, touring a store in this northern town where his company is based. "Three different meats, two salads and dinner rolls for four people -- that's just £1 per person."

Commercials for rival chain J Sainsbury PLC feature celebrity chef Jamie Oliver teaching women to grill pork burgers and telling them to feed their families "for a fiver," or £5, in a deal that includes the burgers and six other foods.

The standoff is having a curious result: Nearly all the major grocery chains seem to be winning. Even with the recession dragging on, many U.K. grocers are posting strong growth in sales and operating profits. Whether the party lasts after the economy recovers is an open question, though, since raising prices again after customers get used to discounts is notoriously difficult.

For now, the chains are benefiting largely because they moved quickly to keep customers from defecting to discounters.

Some developed less-pricey, private-label frozen meals when they found that shoppers wanted food that lasted longer. Others upped their supply of plastic storage containers as consumers kept more leftovers, and offered cheaper cuts of meat for those keen to trim their grocery bills. Still others reinvented themselves entirely. Sainsbury's, for example, was long known for quality foods, but it started touting its low prices to lure bargain hunters.

U.K. stores are considered marketing pioneers in the global grocery industry, and now they're leading the charge in the next wave of price wars, attacking each other more aggressively than they ever have and besieging customers with unexpectedly deep discounts.

U.S. grocers are also slashing prices but didn't start as early nor cut to the degree their British counterparts did -- walk into any of the top U.K. chains, and you're walking into a forest of half-off signs and arrows literally pointing the way to savings. One of the reasons: Comparison shopping is easier in Britain than the U.S. because U.K. grocers have well-developed online businesses and uniform national prices.

The discount moves are part of a sweeping change in British grocery retailing. U.K. grocery stores worked hard to differentiate themselves. British shoppers have long identified with a single store and its perceived strengths -- Sainsbury's good food, Morrison's low-priced deli foods, the broad range of choices at Tesco PLC, or the low prices at Asda, the British unit of Wal-Mart Stores Inc. -- and stayed fiercely loyal to it.

The new, singular focus on value is changing all that, leveling the playing field and creating opportunities for each store to steal customers from others.

Like British grocers, U.S. stores are also seeing sales rise as more consumers cook at home rather than eat out. Taking a page from the British playbook, some are adding new house brands that are more upscale but still cheaper than name brands. Gross margins on store brands, industry experts say, typically exceed those of regular brands by at least 10%. Supervalu Inc., the fourth-largest U.S. food retailer based on sales, has more than doubled the number of goods in its organic private-label brand, Wild Harvest, since its launch in the spring of 2008. Whole Foods Market Inc. added 5% more products to its private-label brand, called 365, in the past year.

Others are adopting marketing tactics from British supermarkets. Kroger Co., the second-largest U.S. food seller after Wal-Mart, is working with Dunnhumby, a data company owned by Tesco, to make better use of the information provided by its loyalty card. Kroger says keeping track of exactly what shoppers are buying helps the company figure out what other new products they might want, and which kinds of discounts they'll be drawn to.

There are signs that the U.K.-style, close customer focus is working. In June, Kroger posted a 13% rise in quarterly profit, fueled in part by higher sales of private-label goods. Store brands accounted for 35% of the Cincinnati-based chain's item sales for the quarter, up three percentage points in the last two years. The data bank built by Dunnhumby, Kroger says, is key to this growth.

Britain's grocery stores were better prepared than most when consumers started cutting back. For years, U.K. supermarkets have been the envy of the global grocery industry for their upmarket private-label brands, nimble supply chains, strong loyalty-card businesses and big online components.

Wal-Mart, for instance, recently chose Britain as the place for a new global retail-marketing academy, where Wal-Mart executives from around the world will learn from British grocery retailing. Wal-Mart is also learning from the U.K. for its home market: The retailer recently started comparative advertising based on techniques developed by Asda.

Sainsbury's supermarkets, such as this store in London, have added cheaper own-label products to woo cost-conscious shoppers.

"The U.K. grocery market is completely different from that in any other country in the world," says Rick Bendel, international chief marketing officer of Wal-Mart. "These are world-class, marketing-led businesses."

But the current price war poses risks for U.K. retailers in the future, industry experts say, when the stores have to move on from recession-time labels.

"Price cuts are management heroin," says Darrell Rigby, head of the global retail practice at consulting firm Bain & Company. "They're addictive. Customers develop a craving for big discounts and an aversion to full prices. Companies get used to the boost in volume and risk a backlash when they try to raise prices later."

The cuts haven't come without casualties. Smaller, independent retailers are losing business and market share to the big guys, and the drive to discount is also fueling tensions with suppliers. Retailers are pushing suppliers to bear part of the burden of discounting, in some cases threatening to yank products.

Duchy Originals, an organic food company founded by Prince Charles, says it had some of its products taken off the shelves of one of the biggest supermarkets last fall after it rejected the chain's demand to cut the prices of its sausages by half and of its cookies by 40%.

"We can't afford to do that," says Chief Executive Andrew Baker, who declined to name the chain. He says the sausages still aren't back in the stores, and the cookies stayed off shelves for two months. Duchy eventually reduced the packaging to be able to sell the cookies at a lower price.

The price war's first salvos were fired in early 2008. Retailers had observed a steep drop in consumer confidence, sparked by TV images of panicked savers lining up to rescue their money from the collapsing bank Northern Rock. By year's end, Asda and Tesco decided to change their advertising tunes -- from cheerful commercials featuring celebrities, friendly staff and quality foods, to hard-hitting price messages. In January, Asda launched attack ads, using colored arrows and simple comparisons of Asda's mostly lower prices to those of its rivals.

"It was an instinctive move at a time of confusion and congenital hysteria, when nobody knew what was going on," says Robert Senior, chief executive of Fallon, a unit of advertising group Publicis that creates Asda's ads. "We had an answer -- every day low prices."

By 9 a.m. weekdays, Asda executives receive an email with lists of prices collected from all grocers' Web sites. Asda's pricing team pores over the data, and if Asda is more expensive on any of the products, it immediately alerts stores to adjust.

In March of last year, the 140-year-old Sainsbury chain joined the fight with its campaign, "Feed your family for a fiver." It also changed the look of its stores, lining the back and center aisles with goods on sale and putting up big signs directing shoppers to them. The price push was aimed at convincing gourmet shoppers that they could still get quality foods but at a better price.

In its most recent quarter, Sainsbury's posted a rise in same-stores sales of 7.8% and announced an aggressive expansion of its store network. On Sunday, the retailer said it would create 1,300 jobs in Scotland as part of that expansion, which is aimed at increasing its shop floor space by 15% over the next 17 months.

This summer, Sainsbury's, which normally runs ads describing the quality and provenance of its food, also ran its first explicit attack ads in years. Instead of its usual slogan, "Taste the Difference," the campaign said, "Spot the Difference." It showed 14 identical products at identical prices in two rows -- one with an orange Sainsbury's label and one with the blue label of rival Tesco.

For Morrisons, the opportunity was the opposite of Sainsbury's. The retailer had a reputation for low prices, but the company says few shoppers knew about its in-store bakers, butchers and fishmongers.

In its current, 40-second commercial, British actor Robert Lindsay, watching fishermen in an idyllic stream, says he wants to buy from a "proper fishmonger, filleting it right in front of me at a good price." In the first quarter of this year, Morrisons same-store sales rose 8.2%, more than those of its three main rivals. Last month, the retailer said the strong sales growth continued in the second quarter and upgraded its earnings forecast for the full fiscal year.

Faced with resurgent rivals, discounters and Asda's relentless price ads, Tesco stepped up its attacks. Its market share nearly twice that of its nearest competitors, Tesco had long been the star performer among British food stores and a role model for international competitors.

In September, the company launched a campaign to position itself as "Britain's Biggest Discounter" -- a claim it has since had to drop -- and introduced a line of 350 new discount products. The retailer is no longer allowed to use the slogan after the country's Advertising Standards Authority ruled last month that the claim was "ambiguous" and "likely to mislead."

Some analysts criticized Tesco's budget brands for complicating its product lineup and confusing its customers. But others said Tesco's broad range is attractive for shoppers, who trade down on staples like detergent but buy premium ice cream or ready meals to replace restaurant visits. The company says 30% of all shopping baskets now include a discount product. In the most recent quarter, same-store store sales rose by 4.3% -- less than at Asda, Morrisons or Sainbury's.

For all the stores' efforts to stand out on price, some shoppers say the battle only makes them look more similar. "The shops all do the same thing," said Monica Lombard, a 31-year-old video producer, surrounded by discount signs in the center aisle of a large Sainsbury's store one recent morning. "What's on offer here is probably on offer at Tesco as well."

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